The Dow has come a long way since Trump’s ascension to the post of the U.S. President. The blue-chip index was lingering at 18,000 at the time of Trump’s election on Nov 8, 2016. However, the index has surged 6,000 points and notched up about 80 record highs since then. This year, the benchmark has gained nearly 24.4%.
The blue-chip index’s run has been powered by strong economic growth of more than 3% for two quarters in a row till the last reported one and stupendous corporate earnings. Moreover, optimism around Trump’s tax reform promises has acted as a necessary catalyst to overall gains so far this year. We suggest you place your bet on those stocks that have surpassed the Dow’s performance this year.
U.S. Economy at Its Highest Rate of Growth
According to the latest report from the Commerce Department, the U.S. economy improved at an impressive annual rate of 3%. This came in above the consensus estimate of 2.6%, but below the second quarter figure of 3.1%. This also marked the first time since 2014 that the U.S. economy has expanded at a 3% annual pace for two consecutive quarters.
The growth rate confirms the economy’s resilience toward devastating events like the recent hurricanes. The strength largely comes from vigorous business spending on equipment, a rebound in corporate profits and solid government spending.
In October, consumer confidence increased from an upwardly revised level of 126.2 to 129.5, exceeding the estimated mark of 123.9. This is the highest level since the reading of 132.6 recorded in November 2000. Consumer confidence also improved on last month’s initial reading of 125.9, which was, at the time, the highest level in 17 years.
During the fifth straight month of gains, the present situations index advanced from 152 to 153.9 while the expectations index increased from 109 to 113.3. A large part of this optimism can be attributed to consumer view on the job market. The section of consumers who expect job openings to increase over the next few months increased from 18.7% to 22.6% in November. (Read More)
Phenomenal Corporate Earnings
Corporate earnings have been outstanding throughout 2017. Much of it can be attributed to President Trump’s promise of introducing tax cuts. Such a claim can be supported by facts, particularly, when we find that there was an 8.8% year-over-year increase in business investment during the second quarter followed by 8.6% growth in the third.
Companies have been optimistic about the likelihood of a slash in corporate taxes. This optimism comes from the fact that a tax holiday would allow large-cap corporations hoarding trillions of dollars held as cash reserve overseas to bring back profits for one-time tax.
Prospects of a Tax Reform Fuel Market Gains
Though the Senate passed the Republican Tax Bill by a narrow margin, this victory takes Trump closer than ever to delivering on the “promise” that was the cornerstone of his campaign — a new U.S. tax code.
The Bill permanently slashes the corporate tax rate to 20%. Further, the tax repatriation provision allows big companies with global operations to bring back trillions of dollars held as cash reserve overseas. Finally, the Bill repeals the individual mandate of Obamacare in a bid to provide the citizens of the United States the freedom to choose from a variety of health plans and relieve them of the penalty for not having a health insurance.
A cut in domestic tax rates would mean that banks and big financial institutions that are weighed down by a hefty tax load would benefit greatly. Moreover, Trump’s one-time tax repatriation policy is likely to improve the overall financial health of tech, drug and biotech companies.
Tech heavyweights such as Apple (AAPL - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Cisco Systems, Inc. (CSCO - Free Report) and Oracle (ORCL - Free Report) hold 88% of their money overseas to avoid paying the 35% corporate tax rate on earnings. Thus, they are positioned to gain immensely under Trump’s tax reduction plan. We expect the momentum to continue in Q4.
Total Q4 earnings are expected to be up 8.8% from the same period last year on 6.8% higher revenues. This would follow 6.9% earnings growth on 6% higher revenues in Q3.
Earnings growth is expected to be positive for 13 of the 16 Zacks sectors, with earnings growth in double digits for six sectors — Energy (up 168.7%), Technology (13.1%), Construction (19.5%), Industrial Products (21.3%), Basic Materials (27.3%), and Autos (22.5%). (Read More)
Buy These 5 Stocks that Outperformed the Dow
The Dow has scaled to record highs this year, banking on steadily strengthening economy and upbeat corporate earnings. Trump’s business-friendly policies also gave a boost to the index. But we have selected such stocks that have even fared better than the blue-chip index. Such stocks are also poised to even gain further in the near term.
These stocks have a favorable Zacks Rank indicating that these have witnessed positive estimate revisions, which generally translate into rapid price appreciation. They flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). Additionally, these stocks have a market capitalization of more than $1 billion.
Textainer Group Holdings Limited (TGH - Free Report) owns and leases a fleet of intermodal containers. The company operates under three broad segments: Container Ownership, Container Management, and Container Resale.
Textainer Group Holdings sports a Zacks Rank #1. The company has expected earnings growth of 133.33% for the current year. The Zacks Consensus Estimate for the current year has improved 153.8% over the last 60 days. The company has returned 201.3% year to date, outperforming the Dow and the industry it belongs to, which has gained 18.7% over the same period.
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Green Dot Corporation (GDOT - Free Report) is a provider of personal banking services. The company also provides reloadable prepaid debit cards and cash reload processing services.
Green Dot has a Zacks Rank #1. The company has expected earnings growth of 46.1% for the current year. The Zacks Consensus Estimate for the current year has improved 3.4% over the last 60 days. The company has returned 151.5% year to date, better than the Dow and the industry it belongs to, which has gained 37.0% over the same period.
American Equity Investment Life Holding Company (AEL - Free Report) is a developer and seller of fixed index and fixed rate annuity products.
The company has expected earnings growth of 110% for the current year. The Zacks Consensus Estimate for 2017 has improved 13.2% over the last 60 days. The company has returned 37.6% year to date, outdoing the Dow and the industry it belongs to, which has gained 23.1% over the same period. American Equity Investment Life Holding has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Extreme Networks, Inc. (EXTR - Free Report) is a provider of software-driven networking solutions. The company also manufactures wired and wireless network infrastructure equipment.
Extreme Networks has a Zacks Rank #2. The company has expected earnings growth of 59.4% for the current year. The Zacks Consensus Estimate for the current year has improved 12.3% over the last 60 days. Extreme Networks has returned 145.4% year to date, outperforming the Dow and the industry it belongs to, which has gained 25% over the same period.
Align Technology, Inc. (ALGN - Free Report) is a manufacturer of system of clear aligner therapy, intra-oral scanners. The company also provides computer-aided design and computer-aided manufacturing (CAD/CAM) digital services.
Align Technology has a Zacks Rank #1. The company has expected earnings growth of 50.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.2% over the last 60 days. Align Technology has returned 143.2% year to date, outperforming the Dow and the industry it belongs to, which has gained 20.3% over the same period.
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