Technology

3 Large-Cap Stocks to Buy and Hold to Start Q2

The S&P 500’s slight climb Wednesday was good enough to set another record close, as the market counties its hot start to the second quarter. Both the benchmark index and the Dow have jumped to records in April, while the tech-heavy Nasdaq has fought its way back to within 3% of its mid-February highs.

Wall Street and investors continue to monitor inflation expectations and rising Treasury yields. But the 10-year U.S. Treasury remains low by historical measures. Along with prolonged TINA investing and a wave of new retail investors, there are plenty of reasons for the bullish sentiment.

The vaccine rollout, which is gaining steam in the U.S., should help some of the hardest-hit areas of the economy bounce back. Meanwhile, the possibility of 6% or higher U.S. GDP expansion—the best in over 30 years—has seen cyclical areas from energy to finance bounce back. All of these fundamentals are boosted by easy money policies and the injection of trillions of dollars into the economy.

We are already seeing the comeback show up in the earnings picture that continues to gain momentum. And JPMorgan’s JPM CEO recently wrote in his annual letter to shareholders that the U.S. economic boom could last until 2023 (also read: Breaking Down the Positive Earnings Picture).

Now let’s jump into three stocks that investors might want to buy now amid the bullish start to the second quarter…

ServiceNow NOW

ServiceNow provides cloud-based services and solutions to nearly 7,000 enterprise customers, including around 80% of the Fortune 500. The digital workflow firm that was added to the S&P 500 index in November 2019 has expanded its partnership with Microsoft MSFT to help it sell to highly regulated industries and house its full SaaS offerings on MSFT’s popular Azure cloud.

The company has grown its sales by over 30% every year since it went public in 2012, including 31% revenue growth in 2020 that saw it pull in $4.5 billion. NOW closed the year with 1,093 total customers with over $1 million in annual contract value, up 23% from a year ago.

ServiceNow is poised to keep growing as part of the constant wave of technology innovation. “The secular tailwinds of digital transformation, cloud computing, and business model innovation have all intersected at the perfect moment in time,” CEO Bill McDermott said in prepared remarks last quarter.

More recently, ServiceNow announced in late March its plans to acquire robotic process automation firm, Intellibot, to help extend its “core workflow capabilities by helping customers automate repetitive tasks for intelligent, end-to-end automation.”

Looking ahead, Zacks estimates call for NOW’s fiscal 2021 revenue to climb 27% to $5.7 billion, with FY22 set to jump another 25% higher to reach $7.2 billion. Meanwhile, its adjusted earnings are expected to jump 18% and 28%, respectively during this stretch.

NOW has consistently topped our bottom-line estimates and it grabs an “A” grade for Growth in our Style Scores system. ServiceNow currently lands a Zacks Rank #3 (Hold) and 17 of the 23 brokerage recommendations Zacks has come in at “Strong Buys,” with none below a “Hold.” And ServiceNow executives said the firm remains on the “path to $10 billion in revenue and beyond.”

The nearby chart highlights ServiceNow’s impressive run over the past five years, with it up nearly 700%. NOW closed regular trading Wednesday at $510.73 a share, which puts it about 15% below its mid-February records. The stock has rebounded over the last several weeks but it still sits near neutral RSI levels, indicating it could have plenty of more room to run. NOW is also trading below its own year-long median in terms of forward sales.

AbbVie ABBV

AbbVie is a pharmaceutical titan that expanded its reach last May when it bought Allergan for $63 billion. The deal helps bolster ABBV’s portfolio as its patent protections run out for one of the world’s top-selling drugs, Humira—biosimilars are already available outside of the U.S., with domestic competition is set to start in 2023. The Allergan deal brought Botox and other popular drugs into a diversified medicine cabinet that includes immunology, oncology, neuroscience, a strong R&D pipeline, and more.

ABBV topped our Q4 estimates in early February, with its FY20 revenue up 38%, driven in large part by its Allergan deal. Luckily, ABBV executives expect to post “impressive growth again in 2021.” Zacks estimates call for its FY21 revenue jump another 22%, with FY22 projected to climb 7% higher to $60 billion. On the bottom-line, its adjusted EPS figures are projected to jump by over 18% this year and another 11.4% in fiscal 2022.

AbbVie, like ServiceNow, lands a Zacks Rank #3 (Hold) at the moment, but its overall adjusted EPS outlook has improved, including positive revisions in the last seven days. On top of that, the firm has continually raised its dividend over the years and its 4.9% yield doubles its industry’s 2.3% average and crushes the recently-rising 10-year U.S. Treasury’s 1.67%.

The dividend yield appears even more impressive when investors consider that ABBV shares are up 34% in the last year to blow away its Large-Cap Pharma industry’s 10% climb. This outperformance stretches out over the last five years. And at around $105 a share, the stock sits about 8% below its January highs.

On the valuation front, ABBV trades at a big discount to its industry at 8.2X forward 12-month earnings vs. 13.8X. The stock is also currently underneath neutral RSI levels (50) at 46. And it might interest some to know that Warren Buffett and Berkshire Hathaway jumped into AbbVie stock last year.

Apple AAPL

Apple is the world’s most valuable company with a $2.1 trillion market cap and needs no introduction. Despite its size and its age, the company posted 21% revenue growth in the first quarter of 2021—period ended on December 26—to reach $111.4 billion. The company topped our revenue estimate by nearly 10%, driven by strength from its new iPhone 12.

AAPL’s first 5G-capable smartphone helped iPhone revenue climb 17% last quarter to account for around 60% of total sales. And it wasn’t just the iPhone that shined in Q1, iPad and Mac sales surged 42% and 23%, respectively, with its Apple Watch and AirPods-heavy wearables unit up 29%.

Wall Street has also remained focused on CEO Tim Cook’s mission to continually make money from its massive and growing user base. These services efforts go far beyond its App Store and include Netflix NFLX and Spotify SPOT competitors, as well as a subscription news offering, a video game platform, digital workout classes, and more.

The world’s most valuable brand closed last quarter with over 620 million paid subscriptions, up 140 million from the year-ago period. Furthermore, Apple aims to bring more of its chips in-house, and there have been reports that it plans to eventually join the electric vehicle race against Tesla TSLA and others.

With this backdrop in mind, Zacks estimates call for AAPL’s FY21 revenue to surge 23% to $337 billion—its strongest sales growth since 2015—and help lift its adjusted earnings by 37%.

Apple stock soared during the early coronavirus comeback and after it announced its 4-for-1 stock split. The stock has cooled off since then, having underperformed the S&P 500 after Sept. 1, down 4% vs. the benchmark’s 16% climb. This run did see Apple jump to new high in January, only to fall victim to the tech selloff.

Despite its 7% jump since March 30, the stock sits around 12% below its record at $128 a share. AAPL is also trading at a discount to its own year-long medians when it comes to forward sales and earnings.

Along with its other fundamentals, Apple last held $84 billion in net cash and it plans to continue buying back stock and paying dividends as it tries to reach “a net cash neutral position over time.” AAPL grabs a Zacks Rank #3 (Hold) at the moment, alongside “A” grades for Growth and Momentum. And now might be a solid time to buy Apple at a discount heading earnings.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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