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5 Top Stocks to Buy Ahead of the Fourth Quarter

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The third quarter of 2018 is about to come to an end and the bull market remains intact. The S&P 500 is up more than 8% so far this year, with some of its stocks near all-time highs and many trading above the 200-day moving average. Chiefly, robust economic growth and upbeat corporate earnings helped offset geopolitical concerns, including conflicts between the United States and its trading partners.

Most of the components of the Conference Board’s Leading Economic Index indicated a 3% or more growth rate in GDP in the final two quarters of the 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.  The economy has already expanded at a seasonally adjusted rate of 4.2% in the April-June quarter, per the Commerce Department. This was the strongest since a 4.3% annual gain was recorded in the third quarter of 2014.

And when it comes to corporate earnings, Q2 growth reached its highest level since 2010, while growth in Q3 is expected to be in double-digits for the 6th time in the last seven quarters (read more: Looking Ahead to Q3 Earnings Season).

In fact, investors are getting optimistic about U.S. stocks, largely because of the encouraging outlook for corporate profits. Per the latest monthly survey of fund managers by Bank of America Merrill Lynch, there is a net allocation of 21% overweight to the U.S. equity market, the highest since January 2015.

The U.S. market, in the meanwhile, is well-poised to survive a scary September. Needless to say, September has traditionally been the worst month for markets, while November and December are generally strong. Valuations, by the way, are reasonable with the forward earnings multiple meeting historical averages and the market’s PEG (price-to-earnings/growth) ratio of 1 being perceived as “fairly valued”.

Thus, more or less everything from fundamentals to sentiments point to a strong year-end rally for the broader markets. This brings us to the obvious question, which stocks to buy? Naturally, you will keep an eye on winners that have been gaining ground for some time now. These growth stocks will continue to outperform as long as the economy is healthy and the bull market chugs along.

But then, which sectors’ growth stocks to choose? Retailers are ruling the roost, thanks to consumers being confident about their well-being and a big end-of-year gain expected due to the upcoming holiday shopping season. Banks are also in the limelight mostly due to rising interest rates, while energy players are doing well owing to rising oil prices.

Things Looking Up for Retailers

U.S. consumer confidence soared to its highest in 18 years this month, per the Conference Board, a business research organization. The consumer confidence index had climbed to 138.4 this month from an upwardly revised 134.7 in August.

Consumers’ optimism was largely driven by robust job growth. The current unemployment rate is now at a nearly two-decade low, while the U.S. economy added jobs for 95 successive months in August, the longest stretch on record.

Such a record-high consumer confidence number is a significant reading since it has been, historically, good at predicting consumer spending for the next three to six months. These numbers influence companies’ production schedule. In fact, retailers are mostly affected as spending plays a major role in determining revenues. Lynn Franco, director of economic indicators at the Conference Board, added that “these historically high confidence levels should continue to support healthy consumer spending, and should be welcome news for retailers as they begin gearing up for the holiday season” (read more: 5 Top Retail Stocks to Buy on Booming Consumer Confidence).

Deloitte added that holiday retail sales could top $1.10 trillion. Per their annual forecast for the holiday season, retail sales are expected to grow between 5% and 5.6% from the year-ago level. Online sales are projected to jump as much as 22% through the holidays — higher than 16.6% witnessed last year.

Fed Lifts Rates — A Boon for Banks

After the end of the two-day meet on Sep 26, the Fed hiked interest rates for the third time this year. Policymakers under Chairman Jerome Powell unanimously decided to lift the federal funds rate by 25 basis points to 2-2.25%. Rates are now at the highest levels since October 2008, just after the collapse of Lehman Brothers (read more: 5 Bank Stocks That Made the Most Since Lehman's Collapse).

Looking ahead to next year, four Fed officials expect two rate hikes; four officials anticipate three and four officials see four hikes. For 2020, almost all officials predict one more rate hike. Policymakers are expected to raise rates gradually as they expect the economy to grow at a steady pace and inflation to remain stable and anchored.

With the Fed raising interest rates and hinting at further hikes in the near term, banks are definitely the go-to rate trade. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities (read more: Fed Issues Third Rate Hike of 2018: Top 5 Gainers).

Rise in Crude Prices Buoys Energy Companies

Oil prices are currently moving north on prospects of a supply crunch. The United States has already ruled out using emergency reserves, aggravating concerns over the potential losses in Iranian supplies. After all, President Trump’s continuous bid to sanction Iranian crude exports could easily lead to a shortfall in global supply.

The present outlook for tightening supplies compelled trading houses to predict a return of higher oil prices last seen in 2014. Even banks such as Bank of America Corporation (BAC - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) have raised their forecasts.

The West Texas Intermediate crude for November delivery rose as much as 55 cents to $72.12 a barrel on the New York Mercantile Exchange on Sep 27, while Brent for November settlement gained as much as 38 cents to $81.72 a barrel on the London-based ICE Futures Europe. Oil’s ascent to new highs, thus, is pushing shares of energy companies. These companies are expected to come up with promising results in the upcoming earnings season.

5 Solid Stocks for the Rest of 2018

Given the aforesaid positives, investing in some of the sought-after retailers, banks and oil majors doesn’t seem to be a bad proposition. We have, thus, selected five such stocks that can make the most of the fourth quarter. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Tilly's, Inc. (TLYS - Free Report) retails casual apparel, footwear, and accessories for young men and women, and boys and girls in the United States. The company currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings jumped 11.1% in the last 60 days.

The stock’s expected growth rate for the next quarter is 41.7%, in contrast to the Retail - Apparel and Shoes industry’s projected decline of 18.6%. The company’s expected growth rate for the current year is 38.5%, way more than the industry’s rally of 13%. 

The TJX Companies, Inc. (TJX - Free Report) operates as an off-price apparel and home fashions retailer. The company currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings increased 1.4% in the last 60 days.

The stock’s expected growth rate for the next quarter is 4.4%, in contrast to the Retail - Discount Stores industry’s projected fall of 19.2%. The company’s expected growth rate for the current year is 21.3%, more than the industry’s rally of 18%. 

Texas Capital Bancshares, Inc. (TCBI - Free Report) operates as the bank holding company for Texas Capital Bank, National Association that provides various banking products and services for commercial businesses, and professionals and entrepreneurs. The company currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings advanced 0.5% in the last 90 days.

The stock’s expected growth rate for the next quarter is 39.5%, slightly more than the Banks - Southwest industry’s estimated rise of 38.3%. The company’s expected growth rate for the current year is 50%, higher than the industry’s rally of 14.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Macatawa Bank Corporation (MCBC - Free Report) operates as the bank holding company for Macatawa Bank that provides commercial and consumer banking and trust services. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 4% in the last 60 days.

The stock’s expected growth rate for the next quarter is 61.5%, more than the Banks - Midwest industry’s expected growth of 37.3%. The company’s estimated growth rate for the current year is 41.8%, higher than the industry’s rally of 29.4%.

EnLink Midstream Partners, LP (ENLK - Free Report) provides midstream energy services. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings soared 37.5% in the last 60 days.

The stock’s expected growth rate for the next quarter is 160%, higher than the Oil and Gas - Production Pipeline - MLB industry’s gain of 62.8%. The company’s expected growth rate for the current year is a whopping 1,366.7%, compared with the industry’s projected rally of 18.1%.

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