My outlook for the market remains very positive, even as I fully acknowledge the potency of the negative forces that weighed on stocks in the first half of the year.
The risks facing us in the second half of the year and beyond pertain to international trade and Fed fears. I strongly believe that the trade issue is essentially a source of headline risk, which stays with us for a while but never becomes a threat to the U.S. and global economy.
The Fed has done an excellent job spearheading the economy through some very difficult times in the recent past, which gives me plenty of confidence that it is more than capable of transitioning the markets to normal interest rates.
Two forces drive stock prices in the long run -- interest rates and earnings. And even pessimists acknowledge that the outlook for both remains very favorable.
The Trump administration's fiscal policies have not only boosted growth, but also increased the length of the current economic expansion that started way back in 2009.
History tells us that every period of economic expansion is followed by a recession and that will eventually happen to this expansion as well. But there is nothing in current economic or corporate data that suggests we are heading towards a recession any time soon. The fact is that the outlook for the U.S. economy is not only stable, but steadily improving.
Keep in mind that stocks are hardly nose-bleed expensive, as would typically be expected in the 9th year of a historic bull run. The S&P 500 index is currently trading at 16.7X forward 12-month earnings, significantly below the late-90s period. When we look at stocks on an earnings-yield basis, they are far more reasonably priced than bonds, their main investment competitor.
3 Ingredients to Outperform
I strongly believe that most investors should be able to generate decent gains through the rest of the year. But if you want better than average performance, then consider the strategies below to outpace the market. The Top 10 for 2018 portfolio, which relies on these and other winning strategies, performed substantially better than the market in the first half of the year.
Continued . . .
2 New Zacks Top 10 Stocks Post Monday AM
From a universe of more than 4,000 stocks, Director of Research Sheraz Mian handpicked 10 as the best buy and holds for 2018. Results from yearly Zacks Top 10s have been spectacular, outperforming the 2012-2017 bullish market +181.8% to +126.3%, and beating this year's S&P 23X over.1
Alert: 2 new picks with exceptional growth potential will appear in the Top 10 early Monday, July 2.
Be First to See Them >>
Investors will need to dig a little deeper to find the best stocks to outperform. Beyond selecting stocks with top ratings (Zacks Rank, Style Scores and Industry Rank), you will also want to load up your portfolio with more of the ingredients listed below.
Ingredient #1: growth, Growth, GROWTH!
Investors have been too risk averse for too long. You have to appreciate that the economy is heating up and that means earnings growth is heating up...and that means investors should be willing to pay more for the companies with truly exceptional earnings growth.
Start with expected earnings growth above the norms. The minimum level is 10% per year...but better at 15%, 20% or more. In addition, seek out companies that are beating earnings regularly with rising estimates. Yes, the Zacks Rank is your best friend in that pursuit. So focus on Zacks Rank #1 and #2 growth stocks.
Ingredient #2: Go Small or Go Home
This one goes hand in hand with Ingredient #1 above. The Flight to Safety movement the past few years also meant outperformance for large cap stocks and those with large dividend yields.
Now those ultra-conservative names are played out and growth oriented small caps and mid caps are starting to win the day. This trend should continue given all the ground they need to make up from the past few years of underperformance.
Yes, these smaller stocks are generally riskier. That is why you should consider having more stocks in your portfolio, each with a smaller allocation. This form of diversification also helps mitigate risk so you can enjoy greater rewards.
Ingredient #3: Value
It never hurts to buy stocks at a discount to their peers. The problem is that most investors have a set of historical standards for what they believe equates to a value stock. I am referring to certain measures of PE or Book Value or PEG etc. that typically denote an undervalued security.
Unfortunately, after 8 years of a bull market you will discover that most every stock is above those levels. Thus, those looking for absolute value based on these historical measures will find no stocks in their basket. So, the key is to use relative value measures to squeeze out additional gains. That is where the Zacks Value Score comes into play.
For example, our "A" rated value stocks are in the top 20% in terms of the value criteria that have been proven to lead to outperformance. Combine that with "B" rated stocks and you will be focused on the top 40% of value stocks available. These stocks should make up the bulk of your portfolio. And yes, do strongly consider selling those with D or F ratings for this important criteria as they will prove to be a drag on your portfolio.
A Good Place to Find Stocks for the Rest of the Year
You are welcome to consult a portfolio with my personally selected picks to outperform the market: Zacks Top 10 Stocks.
Keep in mind that these buy-and-holds fully take into account the challenges and exciting opportunities waiting for us in the months ahead.
Yes, 2018 could end up being an exceptional year. Tax cuts are fueling corporate profits and investor confidence is flying high. Even through 2018's starts, stops, and threatening headlines, our Top 10 selection system continues to deliver strong results just as it did in 2012-2017 when it outperformed the bullish market +181.8% to +126.3%. In fact, this year it's beating the more static market more than 23X over.1
I expect that these stocks will keep on climbing.
Would you like to get a head start toward taking full advantage of this exciting market opportunity? You can be among the first to see 2 brand-new Top 10 stocks when they're released this Monday, July 2.
New Stock #1: I am especially impressed by this small-cap's upside. It has already landed big clients, and is positioned to ride the B2B payment boom that now reaches $20-$25 trillion.
New Stock #2: This cyber-security leader is in high demand for its ability to defend, protect, and archive sensitive data from growing attacks. It's a rock-solid investment with an expanding market and rather astonishing satisfaction of current customers (over 90% renewal rate).
There should be a wave of buying when these stocks are posted, and the sooner you invest in them the greater your potential for gain.
See Zacks Top 10 Stocks Now >>
Here's to abundant gains for the 2nd half of 2018,
Director of Research
Sheraz Mian is our Director of Research. He determines which data to use for assessing stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the Editor of Zacks Top 10 Stocks.
1 As of 6/25/2018