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Specter of October 1987 Fails to Spook Wall Street: 4 Picks

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Last Friday marked the 31st anniversary of ‘Black Monday”, which is known to be the worst trading session ever in Wall Street. On that very day the Dow Jones Industrial Average had tanked 22.6% or 507.99 points. If that happens again, the point loss would be far worse.

A 22.6% drop on the 30-stock index would have amounted to a 5,735.76-point loss. That’s pretty scary! After all, it is way more than the biggest one-day drop on the Dow that happened on Feb 5 this year, when the index closed down 1,175.21 points.

 

Black Monday mostly occurred due to a collapse in the U.S. dollar and wild swings in equities all through the summer of 1987 even though the economy did see some progress. Stocks were, in fact, going through a lot of gyration in the months leading up to the crash.

That reminds us of the current market scenario. The Dow, including the broader market, has been volatile this month. And it’s primarily due to fears of an escalating trade war between the United States and China, continuous rise in benchmark bond yield as well as political problems in Italy and the U.K.

October, by the way, has traditionally experienced well-above-average gyration. For instance, the standard deviation of the Dow’s daily changes has been 1.44% for all Octobers since 1896, much more than 1.05% for all months other than October, per Bespoke Investment Group.

But, very few market analysts expect such a crash as solid earnings, revenues and management outlook will help the stock market gain ground in the near term.

Earnings are likely to rise mostly on healthy economic growth. 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. 

Q3 Earnings to Grow Double Digits

Total earnings are estimated to improve 19.2% from the same period last year on 7.2% higher revenues. Thus, Q3 earnings growth is expected in the double-digit territory for the sixth time in the last seven quarters (read more: Are Q3 Earnings Results Really Good?).

The gains are likely to be broad-based, with nearly all the sectors expected to report year-over-year earnings growth, except for autos and conglomerates.

The energy sector is poised to report the highest earnings growth at 85.9% from the same period last year on 17% higher revenues. The sector is benefitting from the growing evidence of declining crude exports from Iran.

Meanwhile, the construction sector has been looking up, with Q3 earnings expected to rise 36.4% on 19.5% revenue growth. Earnings for the financial sector are set to grow 35.4% from the same period last year on 3.2% higher revenues. Banks, insurers and asset managers are all expected to report double-digit growth mostly due to a higher interest rate environment.

Materials is likely to report the fourth-highest growth in year-over-year profit, with Q3 earnings poised to be up 33.5% from a year ago on 14.3% higher revenues.

High profits are also expected from the retail segment. Total Q3 earnings for the retail sector are projected to rise 15.1% from the same period last year on 6.1% higher revenues. Currently higher consumer confidence will surely boost consumer spending. Retailers, in turn, will gain as rise in spending will drive revenues.

4 Top Picks

Unlike October 1987, Wall Street is poised to rally this time, banking on another round of stellar earnings growth in Q3. This calls for investing in four companies from the aforesaid sectors, which are expected to see a significant uptick in Q3 earnings.

These stocks have a positive Earnings ESP —our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

CNX Resources Corporation (CNX - Free Report) is an independent oil and natural gas company. The stock has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending September on Oct 30. CNX Resources has an Earnings ESP of +43.29%.

First Bancorp (FBNC - Free Report) provides banking products and services for individuals and small to medium-sized businesses, primarily in North Carolina and Northeastern South Carolina. The stock has a Zacks Rank #2. The company is expected to report earnings results for the quarter ending September on Oct 23. First Bancorp has an Earnings ESP of +2.21%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arch Coal, Inc. (ARCH - Free Report) produces and sells thermal and metallurgical coal from surface and underground mines. The stock has a Zacks Rank #1. The company is expected to report earnings results for the quarter ending September on Oct 23. Arch Coal has an Earnings ESP of +6.32%.

Callaway Golf Company (ELY - Free Report) designs, manufactures, and sells golf clubs, golf balls, golf bags, and other golf-related accessories. The stock has a Zacks Rank #1. The company is expected to report earnings results for the quarter ending September on Oct 24. Callaway Golf has an Earnings ESP of +71.42%.

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