The old adage “Sell in May and Go Away” is unlikely to hold true this year. Following a two-month long chain of losses earlier in the year, stocks ended April marginally higher. Now, markets seem set to surge ahead in May and the rest of the summer. The resurgence of tech stocks, which had powered market gains for some time now, is a clear indicator that this rally is set to continue.
Also, the strong performance of small-cap stocks indicates that investors are willing to take on more risk. Meanwhile, trade-related fears are receding. Investors are also choosing to ignore the surge in oil prices. Investing in stocks which have surged over the year and which sport strong fundamentals looks like a smart option at this point.
Tech Stocks Rebound on Strong Earnings
Tech stocks, which constitute nearly 25% of the total market capitalization, have rebounded strongly in recent weeks. The category had been weighed down by a string of headwinds, including persistent concerns over poor demand for Apple Inc.’s (AAPL - Free Report) iPhones.
The data privacy scandal which hit Facebook, Inc. (FB - Free Report) also triggered a broad selloff in tech shares. But a flurry of strong earnings performances, particularly from the dominant FAANG group of stocks, has powered a rebound in recent weeks.
As of May 9, 2018, we have Q1 results from 84.3% of the Technology sector’s total market cap in the S&P 500 index. Total earnings for these companies are up +29.4% on +12% higher revenues, with 91.5% beating EPS estimates and the same proportion beating revenue estimates. (Read: A Critical Look at the Q1 Earnings Season)
Small-Caps Remain Popular
On May 14, the small-cap heavy Russell 2000 index closed 0.4% lower. The decline came despite the index nearly breaching an intraday record created on Jan 24. Further, this also went against a trend which has built up over the last three months, where small-caps have outperformed their larger peers.
A variety of factors have confabulated to create this phenomenon. Firstly, small-caps are viewed as U.S. focused companies. This perception allows them to be insulated from trade-related fears and other geopolitical tensions. Further, factors like a surging dollar are unlikely to impact companies with domestically focused operations.
Trade Fears Receding, Oil Spike Ignored
Meanwhile, trade-related tensions between the United States and China seem to be receding. Firstly, it is increasingly clear that a new NAFTA deal is likely to be concluded. Additionally, in a rare overture to China, Trump announced on Sunday that he would be working with President Xi in order to save phone maker ZTE Corporation.
Also, investors seem to be ignoring the fact that oil prices are close to a four-year high. Instead, markets are enjoying the current rally in energy stocks. Energy stocks gained 0.6% on Monday and the Energy Select Sector SPDR (XLE) is up 6.2% year-to-date.
The rebound in tech stocks and continuing gains in small-cap stocks have ignited a new rally for the markets. With trade war fears receding and investors choosing to ignore the recent spike in oil prices, this stretch of gains is likely to continue over most of this summer.
These factors are likely to negate the old adage of “Sell in May” this time around. Picking stocks with strong fundamentals which have surged over the year looks like a prudent choice at this point. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
GeoPark Limited is an explorer, operator and consolidator of oil and gas.
GeoPark’s projected growth rate for the current year is more than 100% The Zacks Consensus Estimate for the current year has improved by 65.3% over the last 30 days. The stock has gained 43.5% year to date.
Rocky Brands, Inc. (RCKY - Free Report) is a leading designer, manufacturer and marketer of premium quality footwear and apparel.
Rocky Brands’ projected growth rate for the current year is 29.3%. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 30 days. The stock has gained 38.9% year to date.
Seagate Technology Plc (STX - Free Report) is the second-largest manufacturer of hard disk drives (HDDs) in the United States.
Seagate’s projected growth rate for the current year is 28.5%. The Zacks Consensus Estimate for the current year has improved by 8.3% over the last 30 days. The stock has gained 36.4% year to date.
HollyFrontier Corp. (HFC - Free Report) is one of the largest independent refiners and marketers of petroleum products in the United States.
HollyFrontier’s projected growth rate for the current year is 92.9%. The Zacks Consensus Estimate for the current year has improved by 25.5% over the last 30 days. The stock has gained 34.8% year to date.
Micron Technology, Inc. (MU - Free Report) has established itself as one of the leading worldwide providers of semiconductor memory solutions.
Micron’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 4% over the last 60 days. The stock has gained 28.9% year to date.
More Stock News: This Is Bigger than the iPhone!
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