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Real Santa Rally Comes After Christmas: 5 Solid Buys

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The U.S. stock market has done exceedingly well so far this year. In fact, the market’s rally has been quite impressive in recent weeks, with the broader S&P 500 climbing more than 7% from where it started the fourth quarter. Similarly, the Dow has jumped more than 5%. But just because the stock market has gained traction, it doesn’t make it a Santa Claus rally.

After all, the Santa Claus rally or the rally in prices traditionally happens in the final six days of the year. The term was first coined by market analyst Yale Hirsch in 1972 in The Stock Trader’s Almanac. During this period, the Dow has rallied 76% of the time since 1896. The average probability of prices rising in all other six-day trading periods of the year is 55%.

What’s more, both the Dow and the S&P 500 tend to produce healthy gains the year after they have recorded gains of 20%. And so far this year, the Dow is up more than 21.5%. Notably, the Dow tends to climb 75% of the time with an average gain of nearly 8.9% in the following year, when it finishes the earlier year with a gain of a minimum 20%. And when it comes to the S&P 500, the broader index tends to climb 83% of the time with an average gain of 11.2% in the following year. The S&P 500 has already posted an annual gain of 27.9% so far this year.

And why won’t the markets gain after Christmas and beyond? The USMCA trade deal to replace NAFTA, ongoing progress in U.S-China trade deal and encouraging economic data will certainly help the stock market continue its winning streak. Needless to say, investors remained unfazed by President Donald Trump’s impeachment.

The House of Representatives saw both the Democrats and Republicans united in passing an updated version of the 25-year-old NAFTA that many economists believe will eventually prove favorable for the U.S. economy.

On the trade front, the United States has said that China has agreed to increase import of commodities in 2020 and 2021 by almost $200 billion, which includes nearly $40 billion of U.S. agricultural products.

China has also agreed to protect American intellectual property rights and has assured not to manipulate its currency. What’s more, China has called off additional tariffs on U.S. goods. The United States, in the meanwhile, has agreed not to impose extra tariffs on nearly $160 billion of Chinese consumer electronics and toys that were supposed to take effect from Dec 15.

And when it comes to economic data, factory output bounced back after General Motor Company’s strike ended last month, per the Fed. Industrial production increased at a seasonally adjusted rate of 1.1% in November compared to the prior month. That marked the biggest month-over-month increase since October 2017. Now, if we exclude motor vehicles and parts, industrial production was still up 0.5% last month.

Another reading on the U.S. housing sector saw construction of new homes jump in November, a tell-tale sign of continued momentum in the housing sector. Per the Commerce Department, housing starts, a measure of home building, increased 3.2% last month from October to a seasonally adjusted annual rate of 1.365 million. Building permits show that future home construction increased 1.4% in November compared to the previous month to a seasonally adjusted annual rate of 1.482 million.

5 Stocks to Buy for the Santa Claus Rally

Courtesy of positive seasonal trend, the passage of the USMCA trade deal to replace NAFTA, US-China trade truce and improving economic data, we are lined up for a strong year-end rally.

Hence, it will be prudent to invest in five of the best stocks in the market that can make the most of this bullish trend. Such stocks have a Zacks Rank #1 (Strong Buy) and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.

TopBuild Corp. (BLD - Free Report) engages in the installation and distribution of insulation and other building products to the U.S. construction industry. The Zacks Consensus Estimate for its current-year earnings has moved 4% north over the past 60 days. TopBuild has outperformed the Building Products - Miscellaneous industry so far this year (+125.7% vs +47.4%).

 

The company’s expected earnings growth rate for the next year is 14.5%, compared with the industry’s projected rise of 12.8%.

Comfort Systems USA, Inc. (FIX - Free Report) provides mechanical installation, renovation, maintenance, repair, and replacement services to the mechanical services industry in the United States. The Zacks Consensus Estimate for its current-year earnings has moved 7.4% north over the past 60 days. Comfort Systems has outperformed the Building Products - Air Conditioner and Heating industry so far this year (+14.4% vs +10.3%).

 

The company’s expected earnings growth rate for the next year is 15.2%, higher than the industry’s projected rise of 14%.

Installed Building Products, Inc. (IBP - Free Report) engages in the installation of insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors, and other products in the continental United States. The Zacks Consensus Estimate for its current-year earnings has moved 4.9% north over the past 60 days. Installed Building Products has outperformed the Building Products - Miscellaneous industry so far this year (+104.6% vs +47.4%).

 

The company’s expected earnings growth rate for the next year is 14.6%, higher than the industry’s projected rise of 12.8%.

Universal Forest Products, Inc. (UFPI - Free Report) designs, manufactures, and markets wood and wood-alternative products in North America. The Zacks Consensus Estimate for its current-year earnings has moved 1.7% north over the past 60 days. Universal Forest Products has outperformed the Building Products - Wood industry so far this year (+87.1% vs +39.9%).

 

The company’s expected earnings growth rate for the next year is 16.8% versus the industry’s projected rise of 13.8%.

Select Medical Holdings Corporation (SEM - Free Report) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. The Zacks Consensus Estimate for its current-year earnings has moved 6.7% north over the past 60 days. Select Medical has outperformed the Medical - HMOs industry so far this year (+47.3% vs +16.9%).

 

The company’s expected earnings growth rate for the next year is 20.5%, higher than the industry’s projected rise of 16.4%.

Zacks Top 10 Stocks for 2020

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