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Nasdaq Overcomes a Key Benchmark After 6 Months: 5 Picks

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The Nasdaq Composite –- one of the three major stock indexes of Wall Street -- has been performing impressively so far in 2019. On Apr 16, the tech-laden index closed above 8,000 –- a key technical threshold –- for the first time after Oct 3, 2018.

Positive news on the trade war front and Fed’s dovish monetary stance acted as primary catalysts behind Nasdaq’s rally. Consequently, it will be prudent to invest in Dow stocks with a favorable Zacks Rank.  

Nasdaq Rally Continues

Last year was extremely disappointing for Nasdaq. The index plunged 3.9% recording its worst-ever yearly performance since 2008. However, the Nasdaq started 2019 on a strong note. The tech-heavy index is up an impressive 20.6% year to date. Notably, the index is just 1.4% below its all-time closing high of 8,109.69 on Aug 29, 2018 and needs to move another 1.7% to touch its all-time intraday high recorded on Aug 30, 2018.

The primary reason for Nasdaq’s turnaround is the rebound of the technology sector. The technology sector suffered a severe setback in 2018. Technology Select Sector SPDR (XLK), one of the 11 sectors of the S&P 500 Index, declined 2.9% last year. However, XLK has jumped 24.6% so far in 2019.

Why Trade Solution is Important for Tech Sector?

China’s trade spat with the United States – its largest trading partner -- resulted in significant slowdown of its economy. However, a strong Chinese economy will give U.S. technology companies a solid boost as China is the largest market for high-tech products. Notably, the IMF has identified trade war as the primary factor for a perceived global economic slowdown in 2019.

On the other hand, China also plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries. In 2018, the Trump administration levied tariffs worth $250 billion on Chinses imports in two phases. Most of these products are from the high-tech industrial sectors. U.S. companies that rely on Chinese imports are not happy with the move as it raised prices of high-tech equipment and several electronics products.

Most importantly, the major concern of the Trump administration was the intellectual property theft by Chinese companies in the guise of producing goods for American tech giants. National security concerns lead to the imposition of tariffs.

At this juncture, an amicable solution to the U.S.–China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. tech giants. Moreover, if Trump clinches a lasting agreement with China to strictly protect the country’s intellectual properties, will be immensely beneficial for U.S.-tech behemoths.

Other Positives for Tech Sector

The technology sector is benefiting from continued strong digital transformation. The last few years witnessed a series of breakthroughs in cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, which have set the stage for robust growth.

Our Top Picks

At this stage, investment in Nasdaq Composite stocks with a positive Earnings ESP and a Zacks Rank #3 (Hold) or better should prove to be lucrative. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

We have been able to narrow down our search to five stocks with a Zacks Rank #1 (Strong Buy) and positive ESP, which have moved higher in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart shows price performance of our five picks year to date.

Cadence Design Systems Inc. (CDNS - Free Report) provides software, hardware, services and reusable integrated circuit design blocks worldwide. The stock has surged 48.8% year to date. It has an Earnings ESP of +0.50% for the current quarter and an expected earnings growth rate of 25%. The company is expected to release earnings results on Apr 22.

Xilinx Inc. (XLNX - Free Report) designs and develops programmable devices and associated technologies worldwide. The stock has surged 58.5% year to date. It has an Earnings ESP of +1.75% for the current quarter. The company, which is likely to release earnings results on Apr 24, has an expected earnings growth rate of 48.4% for the current quarter.

Synopsys Inc. (SNPS - Free Report) provides electronic design automation software products. The stock has surged 38.6% year to date. It has an Earnings ESP of +1.15% and expected earnings growth rate of 0.9% for the current quarter. The company is expected to release earnings results on May 22.

MongoDB Inc. (MDB - Free Report) operates as a general purpose database platform worldwide. The stock has surged 65% year to date. It has an Earnings ESP of +0.69% and expected earnings growth rate of 44.2% for the current quarter. The company is expected to release earnings results on Jun 5.

CommScope Holding Co. Inc. (COMM - Free Report) provides infrastructure solutions for communication networks worldwide. The stock has surged 62.8% year to date. It has an Earnings ESP of +1.89% for the current quarter and is expected to release earnings results on May 7.

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