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A Santa Rally or a Year-End Pullback in Offing: 5 Top Picks

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U.S. stocks are firing on all cylinders with major stock indexes hitting new highs a record number of times in 2019. Year to date, the three major stock indexes – the Dow, the S&P 500 and the Nasdaq Composite – have rallied 20.3%, 25.3% and 30.6%, respectively. By any means, this is an impressive performance after a pathetic 2018 when all these indexes finished in the red.

At present, Wall Street seems unstoppable despite any concrete resolution to the more-than-a-year-old U.S.-China trade conflict. However, as we enter in the final month of 2019, the investor circle is busy guessing whether a Santa rally or a year-end pull-back is in store.

Conditions Ripe for a Santa Rally

A Santa Claus rally is a typical Wall Street phenomenon associated with unusually strong stock-market gains during the last five trading days of the year and the first two trading days of the New Year. Per Dow Jones Market Data, the Dow and the S&P 500 have gained 1.4% and 1.3%, respectively, on average since 1950 during this period.

Several economists and financial experts believe that the situation is conducive this year for a Santa rally. A fundamentally stable U.S. economy, which is growing for the longest span of 11 years, albeit with some loss in pace, and a dovish monetary stance adopted by the Fed in 2019 are the two major drivers of Wall Street.

The central bank cut benchmark interest rate by 75 basis points in 2019 and indicated maintaining a stable monetary policy in the near future.  Furthermore, the government bond yield curve has steadied, eliminating fears of an impending recession.

Furthermore, the U.S. GDP growth rate did not fall below 2% in the first three quarters of 2019, buoyed by strong consumer spending, which constitutes more than 70% of the economy. Additionally, a solid labor market and gradual wage growth offset drop in business spending and manufacturing activities.

U.S.-China Trade Conflict Remains a Hurdle  

At present, the only stumbling block for a smooth Santa rally is the unresolved trade war with China. On Oct 11, President Donald Trump said that the two countries were close to signing a phase-one trade deal. However, nothing concrete happened till the end of November, though both sides expressed their desire to reach an amicable solution soon.

On Nov 27, President Trump signed two bills supporting the Hong Kong protesters, despite China’s repeated objections. China threatened to retaliate. “It is a stark hegemonic practice & a severe interference in Hong Kong affairs, which are China’s internal affairs. China will take strong counter-measures” per the country’s foreign ministry.

Notably, the phase-one deal needs to be signed by Dec 15, which the U.S. government set to impose a new round of tariff on $160 billion of Chinese goods. The Trump administration can also raise tariff rate on $250 billion of Chinese goods already under U.S. tariff. On Nov 29, Reuters reported that the U.S. government may expand its power to stop more foreign shipments of products with U.S. technology to China’s telecom giant Huawei Technologies.

Our Top Picks

While a Santa rally can push stock indexes to finish the year with record high gains, intensification of trade conflict can result in a stock market plunge, at least for a short-period of time. To remain safe at this stage, it will be prudent to invest in growth stocks with good dividend yield. These stocks are likely to capture market’s growth, while in case of a downturn, dividends will provide regular income.

We have narrowed down our search to five stocks that have gained year to date and still have potential for growth.  Each of our picks carries a Growth Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

 

Lithia Motors Inc. (LAD - Free Report) is one of the leading automotive retailers of new and used vehicles and related services in the United States. The company has an expected earnings growth rate of 18.3% for the current quarter. The Zacks Consensus Estimate for the current quarter has improved 2.8% over the past 60 days. The stock has a dividend yield of 0.8% and has jumped 110.4% year to date.

Universal Forest Products Inc. (UFPI - Free Report) designs, manufactures, and markets wood and wood-alternative products in North America, Europe, Asia, and Australia. The company has an expected earnings growth rate of 21.3% for the current quarter. The Zacks Consensus Estimate for the current quarter has improved 1.7% over the past 60 days. The stock has a dividend yield of 0.8% and has gained 91.1% year to date.

Spark Energy Inc. (SPKE - Free Report) operates as an independent retail energy services company in the United States. It operates through two segments, Retail Electricity and Retail Natural Gas. The company has an expected earnings growth rate of 139.1% for the current quarter. The Zacks Consensus Estimate for the current quarter has improved 139.1% over the past 60 days. The stock has a dividend yield of 6.6% and has risen 48.4% year to date.

DICK'S Sporting Goods Inc. (DKS - Free Report) operates as a sporting goods retailer primarily in the eastern United States. It provides sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear products, apparel; and footwear and accessories. The company has an expected earnings growth rate of 10.8% for the current quarter. The Zacks Consensus Estimate for the current quarter has improved 6.2% over the past 60 days. The stock has a dividend yield of 2.4% has rallied 46.8% year to date.

Casey's General Stores Inc. (CASY - Free Report) operates convenience stores under the Casey's and Casey's General Store brand names in the United States. The company has an expected earnings growth rate of 14.5% for the current quarter. The Zacks Consensus Estimate for the current quarter has improved 1.1% over the past 60 days. The stock has a dividend yield of 0.7% and has surged 35.6% year to date.

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