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5 Must-Have Stocks for Historically Weak September

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As we enter September, the U.S. equity benchmarks are either at or near all-time highs. The S&P 500 and the Nasdaq are hovering at their new highs while the Dow Jones Industrial Average is within a striking distance of its peak touched in late January.

The latest gains came following the trade deal between the United States and Mexico that paves way for the replacement of North American Free Trade Agreement (NAFTA) and optimism to strike a deal with Canada. A slew of upbeat data, which underscores strengthening of the economy, also added to the strength.

In particular, GDP growth has been revised up from the initial reading of 4.1% to 4.2%, representing its best performance in nearly four years. This put the economy on track to hit the Trump administration’s goal of 3% annual growth. Meanwhile, Americans continue to be optimistic as the Consumer Confidence Index, measured by the Conference Board, jumped to 133.4 -- the highest level since October 2000 -- from the revised 127.9 in July.

What’s in Cards for September?

However, the bullish trend might distort and the bulls could struggle this month given the ongoing troubles in emerging market, looming additional Trump’s tariffs on Chinese imports, the potential for auto tariffs on other countries, Iran oil sanctions, another budget deadline, and the presidential midterm election in November. Both the United States and China implemented the second round of tariffs on $16 billion of each other’s goods, effective Aug 23. Trump is looking to implement tariff for another $200 billion in Chinese goods as soon as a public-comment period concludes this week.

Additionally, September is historically the weak for the stock market. According to data from "Stock Trader's Almanac,” September has been the worst month for the Dow Jones Industrial Average and the S&P 500 since 1950 with average declines of 0.7% and 0.5%, respectively. The Nasdaq Composite, which was introduced in 1971, also dropped 0.5% on average.

The declines are because of the seasonal phenomenon. This is especially true as investors are more prone to selling than buying when they return from their summer vacations; increased trading volume after Labor Day is bearish; many mutual funds have fiscal years ending on Sep 30, window-dressing is rampant; and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

Further, midterm election leads to higher losses in September. Per Almanac data, the Dow Jones and Nasdaq's average losses for September widened to 1% and 0.8%, respectively, in midterm election years while the S&P 500 losses improved slightly to an average of 0.4%.

Against such a backdrop, investors should focus on some niche areas that will provide some downside protection in addition to capital appreciation. For them, we have highlighted five of those that could lead to a winning portfolio during this soft month:

Low-Beta Stocks

Low-beta stocks exhibit greater levels of stability and usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the stocks are considered safe and resilient.

Global Brass and Copper Holdings Inc. (BRSS - Free Report) having beta of 0.09 seems a good bet in this category. Based in Schaumburg, IL, Global Brass and Copper is a converter, fabricator, distributor and processor of copper and brass products primarily in North America. It has expected earnings growth of 14.75% for this year and belongs to the top-ranked Zacks Industry (top 31%). The stock carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. You can seethe complete list of today’s Zacks #1 Rank stocks here.

Value Stocks

Value stocks have proven to be outperformers over the long term and are less susceptible to the trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.

Illinois-based Archer Daniels Midland Company (ADM - Free Report) procures, transports, stores, processes, and merchandises agricultural commodities and products. It has a Value Score of A and estimated earnings growth of 40.33% for this year. The stock sports a Zacks Rank #1 and falls under the top-ranked industry (top 8%).

Small-Cap Stocks

Since small-cap stocks have less international exposure and generate most of their revenues from the domestic market, these are less vulnerable to a trade war or any other political or international issue.

California-based Turtle Beach Corporation (HEAR - Free Report) could be an intriguing choice given its projected earnings growth of 1,004.17% for this year. This company provides various gaming headset solutions to various platforms, including video game and entertainment consoles, handheld consoles, personal computers, and mobile and tablet devices under the Turtle Beach brand. The stock has a Zacks Rank #1 and VGM Score of B. It belongs to a top-ranked Zacks industry (top 29%).

Quality Stocks

Quality investing also seeks safety and protection against volatility. Quality stocks tend to outperform as these are rich in value characteristics, with healthy balance sheets, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth.

Texas-based D.R. Horton Inc. (DHI - Free Report) is engaged in the construction and sale of high-quality homes through its diverse brand portfolio that includes D.R. Horton, Emerald Homes, Express Homes and Freedom Homes. It has a low debt/equity ratio of 0.35, five-year historical EPS growth of 21.85%, an estimated growth rate of 15.37% for sales and 41.24% for earnings this fiscal year, and a dividend yield of 1.12%. Moreover, the stock belongs to a top-ranked Zacks industry (top 38%), and has a Zacks Rank #1 and VGM Score of A.

Dividend Stocks

The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both the worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While there are several top-ranked options available in the space, New Jersey-based NRG Yield Inc. having a strong history of dividend growth seems to be a good pick. The company acquires, owns and operates contracted renewable and conventional generation as well as thermal infrastructure assets primarily in the United States. The stock has five-year historical dividend growth of 38.76% with higher yields of 6.06% and estimated earnings growth of 39.51% for this year. NYLD carries a Zacks Rank #1 and has a VGM Score of B. It also belongs to the top-ranked Zacks industry (top 7%).

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge. With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research. It's not the one you think.

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