The Dow Jones Industrial Average recorded an all-time closing
high of 16,000 on Nov 21, while fellow benchmark S&P 500
Index is also hitting newer peaks at regular intervals. However,
one cannot run down investors' apprehension about a market
correction happening anytime soon.
It's true that a superlative performance by the broader equity
markets is a precursor to the overall improvement in the economy
as stocks are usually the front-line indicators. Nonetheless, a
165% rally since 2009 and high valuation metrics of the S&P
500 (trading 17x reported profit - the highest valuation since
May 2010) spur antagonist feelings that the rise may have been
too fast and too far beyond the comfort zone.
Despite the acrophobia, or fear of heights, the market still
boasts a handful of stocks that have defied the law of averages.
Before we cherry-pick some outperformers, let us have a recap of
the various turn of events.
The Driving Factors
The spurt in various indices is primarily attributable to the
Federal Reserve's economic stimulus that is centered on an $85
billion monthly bond repurchase program to spur growth. Although
Fed initially fueled speculations of a partial withdrawal of the
economic stimulus, or QE3 tapering, in September, it eventually
backed off citing several macroeconomic headwinds, including high
unemployment rate, low inflation, rising mortgage rates and a
Both current Fed Chairman Ben Bernanke and Chair successor Janet
Yellen have vouched to continue the stimulus and near-zero
interest rates until at least the economy improves to an optimal
level. The latest minutes from the FOMC meeting noted that the
economic data will "prove consistent with the committee's outlook
for ongoing improvement in labor market conditions and would thus
warrant trimming the pact of purchases in coming months."
As the Fed deferred its decision of tapering, equity markets kept
hitting record highs buoyed by strong quarterly earnings by
majority of the S&P 500 companies. Statistics reveal that the
third quarter earnings season had been probably the best so far
in 2013. Total earnings for the 460 S&P 500 companies that
have reported results till the morning of Nov 14 are up 4.8%
compared with the year-ago period.
About 65.2% of these companies have outpaced earnings
expectations with a median surprise of +2.5%. Furthermore, total
reported revenue are up 3.0% as 42.2% of these companies beat
revenue expectations with a median surprise of +0.1%.
BOEING CO (BA): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis
FORD MOTOR CO (F): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
NETFLIX INC (NFLX): Free Stock Analysis
NIKE INC-B (NKE): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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About 86 companies in the S&P 500 Index have climbed over 50%
or more so far this year. These include some stellar performances
by diverse companies such as drug store chains
CVS Caremark Corp.
); grocery store chains
The Kroger Co.
); and blue-chip Dow components like
The Boeing Co.
The stock markets also benefited from the reform push in China,
the second biggest economy in the world, as it tries to steer
away from an investment-led growth to a consumption-driven
economy. In addition to societal changes that relaxed the
one-child policy to support an aging population, China
liberalized the labor market by allowing the free movement of
labor and encouraging urbanization. At the same time, the
communist country offered greater freedom to farmers and stepped
up financial reforms to allow markets to play a decisive role in
Although Dow closing above an all-time high of 16,000 is worthy
to take note, it does not mean anything in isolation. Rather,
it's more of a psychological effect and entices investors into
buying more equities.
As more investors park their money in the equity market, both Dow
and the S&P 500 Index continue to gain traction. The
benchmarks have risen 22% and 26%, respectively, so far in 2013.
According to data from the Investment Company Institute, the
national association of mutual funds; closed-end funds;
exchange-traded funds (ETFs) and unit investment trusts (UITs),
investors have put over $140 billion in 2013 into mutual funds
that invest in stocks compared to a net outflow of $153 billion
Another data from TrimTabs Investment Research, a leading
independent institutional research firm focused on the supply and
demand of shares of stock and money available for investment,
reveal that $277 billion have been invested into stock-based
mutual funds and exchange traded funds through Oct 25 - the
largest inflow in a year since the tech bubble burst in 2000,
when about $324 billion went into these funds.
The bullish sentiment is likely to be echoed across the globe. On
Nov 18, when Dow first reached the 16,000 milestone before
closing a notch lower, the MSCI Emerging Markets Index rose 2% on
the news - the most in two months. The Shanghai Composite Index
had climbed 2.9% while India's benchmark index, the Sensex,
advanced 2.2%. In addition, indices in diverse countries like
Brazil, Indonesia, Turkey, Poland and the Czech Republic also
moved up over 1% each.
3 Top Stock Picks
Amid such chart-busting performance by the equity market across
most indices in the recent times, there are certain stocks with
attractive valuation metrics backed by a solid Zacks Rank. Let's
take a closer look at these companies that appear to be well
positioned to benefit from the solid sector dynamics.
): Headquartered in Los Gatos, Calif., Netflix offers Internet
television network services across the globe, enabling
subscribers to stream TV shows and movies directly on TVs,
computers, and mobile devices. This Zacks Rank #1 (Strong Buy)
stock has a phenomenal year-to-date return of 278.8% and is
currently trading at a forward P/E of 195.4x with a long-term
earnings expectation of 21.7%. Netflix's focus on improving user
engagement has been its primary growth driver and its subscriber
base had increased 10.87 million year over year to 40.28 million
in the recently concluded third quarter of 2013.
Ford Motor Co.
): Based in Dearborn, Mich., this automobile major manufactures
vehicles, parts, and accessories worldwide. Recently, Ford became
the first truck manufacturer to offer a half-ton pickup truck
that is capable of running on both compressed natural gas (CNG)
and liquefied petroleum gas (LPG). The Ford F-Series trucks have
already surpassed the full-year 2012 sales tally of 645,316 and
full-year 2013 sales is likely to be the highest since
2006. This Zacks Rank #1 stock is trading at a forward P/E
of 10.3x and has a long-term earnings expectation of 12.3% with a
year-to-date return of 32.89%.
Best Buy Co., Inc.
): Headquartered in Richfield, Minn., Best Buy operates as an
e-commerce and physical retailer of consumer electronics in the
U.S., Europe, Canada, and China. This Zacks Rank #2 (Buy) stock
had a fairytale turnaround as it reversed its streak of loses in
2012 in this year riding on strategic investments and stringent
cost-cutting measures. The year-to-date return of the stock is
currently pegged at 237.1% and is trading at a forward P/E of
15.7x. The long-term earnings expectation of 9.7% also looks
Don't Miss These Golden Geese
The equity market perhaps is currently passing through its stage
of maturity and the euphoria is likely to continue in the short
term. As the U.S. stocks continue their unrelenting rally of
reaching new all-time highs in most major indices, this is
perhaps the most opportune time to own such high-potential stocks
with strong fundamentals that pledge a healthy ROI.