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Blue Chips Wrapping Up a Solid Q3: 4 Top Picks

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This time around, mega-cap stocks mostly dominated the S&P 500’s blowout Q3 results. Despite lofty valuations and the recent stock market carnage, big U.S. stocks saw a dramatic surge in sales and profits.

From the end of third-quarter 2017, the S&P 500 has rallied 15.7%. But, its widely-held mega-cap stocks collectively registered an incredible 24.2% year-over-year growth, solely banking on stellar Q3 results.

Catalysts Behind Q3 Earnings

The mega-cap stocks’ earnings, revenues and management outlook are primarily boosted by solid economic growth and rise in spending levels.

The U.S. economy got a boost in the third quarter, with GDP increasing at an annualized pace of 3.5%, per the U.S. Commerce Department. Economic growth during the July-September quarter was better than estimates of about 3.4%. In fact, the country’s total output of goods and services followed an even stronger 4.2% growth in the second quarter, which marked the strongest rise since a 4.3% annual gain in the third quarter of 2014.

The two quarters, thus, recorded the fastest six-month growth in four years and is on track to hit 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.

 

 

It was robust consumer spending that powered the economy in the third quarter. Consumer spending, which accounts for more than two-third of economic output, grew 4% in the quarter, the strongest since the fourth quarter of 2014.

The tax overhaul policy also provided the much-needed wherewithal to corporates. After all, tax laws gave companies massive relief as they will now be paying between 8% and 15.5% instead of the earlier 35% for bringing back money held overseas.

4 Blue Chips to Buy on Solid Q3 Earnings

Let us take a look at four mega-cap stocks that have not only posted upbeat results this earnings season but are also poised to maintain their winning streak in the near future on balance sheet and cash flow strength.

Microsoft Rides Cloud to Impressive Earnings Beat

Microsoft Corporation’s (MSFT - Free Report) revenue figures for the three months ending September topped analysts’ forecasts, including its Intelligent Cloud computing division, where Azure sales jumped 76% aiding the division sales climb of 24% to $8.6 billion. The productivity and business unit that includes Office 365 suite of products also saw a sales rise of 19% to $9.8 billion and personal computing revenues increased 15% to $10.7 billion.

CFO Amy Hood told investors that “customer demand for our hybrid and cloud offerings drove the quarter and we continued to benefit from favorable macroeconomic and IT spending trends.” Incidentally, Microsoft’s Azure cloud business is second after Amazon.com, Inc.’s (AMZN) AWS cloud platform in terms of market share.

Microsoft came out with quarterly earnings of $1.14 per share, easily beating the Zacks Consensus Estimate of 96 cents per share. The Zacks Consensus Estimate for earnings has trended upward over the past 60 days, as estimates have moved up from $4.25/share to $4.39/share right now. The Zacks Rank #2 (Buy) company’s current-year earnings are expected to rise 13.1%, slightly higher than the industry’s gain of 12%. The stock has outperformed the Computer - Software industry so far this year (+25% vs +21.6%).

 

Warren Buffett’s Insurers Withstand Storms

Berkshire Hathaway Inc.’s (BRK.B - Free Report) insurers somehow dodged the losses caused by Hurricane Florence in the third quarter and provided the biggest upward swing from last year. Banking on a lower tax rate, the company delivered Q3 earnings of $6.9 billion that nearly doubled from $3.4 billion earned a year ago. 

The company focused on new trends ranging from more train traffic on its railroad to an uptick in demand for electronic components. But, the biggest boost came from the insurance division. After all, catastrophe costs contracted almost 90% from last year’s terrible third quarter, the sharpest decline among all major publicly-traded U.S. insurers.

The Zacks Consensus Estimate for its current-year earnings has increased 4.3% in the last 60 days. The company’s expected earnings growth rate for the current year is 70.1% compared with the Insurance - Property and Casualty industry’s projected rise of 20.3%. The Zacks Rank #1 (Strong Buy) company has outperformed the broader industry in the year-to-date period (+8.7% vs +8.2%). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Intel Reports Top and Bottom-Line Beats

The chip giant, Intel Corporation (INTC - Free Report) earned $1.40 per share in the third quarter, compared to the Zacks Consensus Estimate of $1.15 a share. Intel has breezed past profit estimates for the 12th straight quarter. Revenues of $19.2 billion beat the Zacks Consensus Estimate by 5.79%.

Interim CEO Bob Swan said in a statement that “stronger than expected customer demand across our PC and data-centric businesses continued in the third quarter. This drove record revenue and another raise to our full-year outlook, which is now up more than six billion dollars from our January expectations. We are thrilled that in a highly competitive market, customers continue to choose Intel.”

The Zacks Consensus Estimate for earnings has trended upward over the past 60 days, as estimates have risen from $4.13/share to $4.53/share right now. The company’s expected earnings growth rate for the current quarter and year are a solid 12.9% and 30.9%, respectively. The Zacks Rank #1 company has managed to outdo the Semiconductor - General industry so far this year (+1.1% vs -4.0%).

 

Boeing Flies High

Aerospace and defense giant The Boeing Company (BA - Free Report) handily beat third-quarter earnings and revenue projections. The Chicago-based company reported quarterly earnings of $3.58 per share, beating the Zacks Consensus Estimate of $3.45. Revenues of $25.15 billion surpassed the Zacks Consensus Estimate by 6.03%. Boeing added that third-quarter revenue growth was driven by higher defense volume and services growth.

Chairman and Chief Executive Officer Dennis Muilenburg, chipped in and said that “during the quarter we captured important new defense business, winning and investing in the MQ-25 and T-X programs and securing the MH-139 contract, clearly demonstrating the value Boeing brings to customers while positioning us well for future growth opportunities.”

The Zacks Consensus Estimate for its current-year earnings has increased 2.6% in the last 60 days. The company’s expected earnings growth rate for the current year is 24.5% compared with the Aerospace - Defense industry’s projected rise of 20.5%. The Zacks Rank #2 company has outperformed the broader industry year to date (+21.1% vs +4.3%).

 

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