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5 Top Stocks to Challenge a Notorious September

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Summer is unofficially over and traders are back in business after the extended Labor Day break. But, September is historically the worst month for the stock market. And this September could be particularly a tough one as it has midterm elections.

But, investors shouldn’t give up hope just yet. Among the two pillars of the U.S. economy, consumer confidence remains at strong levels and corporate earnings continue to grow. At the same time, the broader market did rise every year after Labor Day during the current bull market. Courtesy of these positives, investors should focus on fundamentally sound companies that can make the most of the current scenario.

September —Typically a Rocky Month for Stocks

Stocks generally tend to wobble in September, and this year the odds are even greater. A series of concerns including an additional $200 billion worth of tariffs on imports from China, scheduled Iran oil sanctions and Congress facing another budget deadline are denting investors’ sentiments.

September is also the month, when the Fed is widely expected to raise rates for the third time this year. That certainly doesn’t bode well for the economy. Lest we forget that an accommodative monetary policy helped the market recently complete the longest ever bull run ever (read more: Wall Street's Longest Bull Run Shapes Winners & Losers).

If history is a guide, Stock Trader’s Almanac found out that in September, since 1950, the S&P 500 and the Dow averaged a loss of 0.5% and 0.8%, respectively. The Nasdaq Composite, as incepted in 1971, averaged a loss of 0.5%, as did the Russell 2000 of small-cap stocks since it was started in 1979. CFRA added that the broader S&P 500 has averaged a 1% decline, particularly, in September going back to 1946.

Midterm Election — The Bull Market’s Next Challenge

Strategists are, in fact, saying that a look at the historical performance shows that stocks see more volatility in the September that features midterm elections.

In the last 11 midterm election years since 1974, the S&P 500 mostly traded flat through September only to rally once political uncertainty waned, per The Goldman Sachs Group, Inc. (GS - Free Report) . In those years, stock market volatility averaged 15% compared with the median of 12% in all years. After all, shift in balance of power in Washington does have significant implications for fiscal policies and strategic foreign relationships.

Here is Why You Shouldn’t Sell in September

September is upon us and even though there are issues that compel us to stay away from stocks, we shouldn’t be doing so from an investment standpoint. Meanwhile, August, which is mostly a volatile month, saw both the Dow and the S&P 500 register the best gains since 2014. This is because the two pillars of the U.S. economy — consumers and corporates — are still solid.

Consumers are pretty confident about their well-being and do not refrain from spending. According to the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July, the highest level since October 2000 and above the post-recession high of 130 scaled this February. In fact, the only other period when consumer sentiment was higher was in the Internet-fueled boom of 1997 to 2000 (read more: US Consumers Most Confident Since 1990s Internet Boom: 5 Picks).

Consumers’ optimism was largely driven by strength in the labor market. The jobless rate dropped to 3.9% in July. The current unemployment rate is now at a nearly two-decade low, while the U.S. economy added jobs for 94 successive months in July, the longest stretch on record.

Wages and salaries grew in the second quarter at the fastest pace in almost a decade, while the overall economic output expanded at a 4.2% annual rate in the April-June quarter, the fastest in almost four years. On the whole, the economy expanded 3.2% in the first half of this year and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession (read more: 5 Top Stocks to Ride on Best Economic Growth in 4 Years).

And when it comes to Q2 earnings, 467 S&P 500 companies that have reported so far have seen an earnings increase of 25.5% from the same period last year on 9.9% higher revenues, with 79.2% of the companies beating EPS estimates and 72.8% surpassing revenue estimates.

For the quarter as a whole, total Q2 earnings for the index are expected to be up 24.9% from the same period last year on 9.7% higher revenues. This exceeds the first quarter’s 24.6% earnings growth, the highest quarterly rise since 2010 (read more: Strong Retail Sector Earnings Performance).

Traditionally Markets Rise After Labor Day

Investors, by the way, should expect U.S. stocks to scale north especially after a Labor Day holiday weekend. As per data compiled by Bloomberg, the S&P 500 has always moved higher after Labor Day every year since the bull market began in 2009.

Market gains have averaged 7.2% and have more or less ranged between 1.4% in 2012 and 13.9% in 2010. This trend has been recently mentioned by Rocky White, a quantitative analyst at Schaeffer’s Investment Research.

5 Best Stocks to Buy in September

Since a ‘buy-in-September’ opportunity maybe playing out in the equity market, investing in solid stocks will be prudent. These stocks not only possess a Zacks Rank #1 (Strong Buy) but also are poised to gain significantly in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Such stocks also flaunt a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Bristol-Myers Squibb Company (BMY - Free Report) discovers, develops, licenses, manufactures, markets, and distributes biopharmaceutical products. The company has a VGM Score of B. In the last 60 days, eight earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 5.5% in the same period. The company’s projected growth rate for the current year is 20.3%, while the Large Cap Pharmaceuticals industry is expected to rise 8.7%.

Cleveland-Cliffs Inc. (CLF - Free Report) operates as an iron ore mining company. The company has a VGM Score of A. In the last 60 days, four earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings rose 24.1% in the same period. The company’s projected growth rate for the current year is 240%, while the Mining - Miscellaneous industry is estimated to rise 9%.

Callaway Golf Company (ELY - Free Report) designs, manufactures, and sells golf clubs, golf balls, golf bags, and other golf-related accessories. The company has a VGM Score of A. In the last 60 days, 10 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings surged 23.5% in the same period. The company’s projected growth rate for the current year is 88.7%, while the Leisure and Recreation Products industry is projected to rise 35.5%.

SkyWest, Inc. (SKYW - Free Report) operates a regional airline in the United States. The company has a VGM Score of B. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings advanced 6% in the same period. The company’s projected growth rate for the current year is 43.4%, while the Transportation - Airline industry is expected to decline 9.5%.

Vishay Intertechnology, Inc. (VSH - Free Report) manufactures and supplies discrete semiconductors and passive components. The company has a VGM Score of B. In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings improved 11.7% in the same period. The company’s projected growth rate for the current year is 39.9%, while the Semiconductor - Discretes industry is likely to rise 29.9%.

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