The month of May has been a rocky one for the equity market, thanks to renewed trade war fears. But as we unofficially enter summer this week, most are betting big on a comeback. After all, U.S. household sentiment continues to be upbeat despite flare-up in trade tensions and gas prices.
According to the Conference Board, the consumer confidence index climbed to 134.1 in May from 129.2 in April. The key economic indicator that measures attitudes on economic prospects easily exceeded analysts’ expectations. The index for current economic conditions rose to an 18-and-half-year high of 175.2, while the index of consumer expectations increased to 106.6 from 102.7.
But, what has been driving the confidence? Strength in the domestic economy for sure! Payrolls jumped a solid 263,000 in April, per the Labor Department, exceeding all expectations. Unemployment rate fell to 3.6%, a 49-year low, and average hourly earnings growth was unchanged at a healthy 3.2%.
The Commerce Department added that the U.S. economy expanded at a 3.2% annual pace in the January-March period, the best first-quarter growth since 2015. The gain was well above analysts’ expectations of a 2.3% increase in gross domestic product. Most importantly, the gains overcame headwinds like government shutdown in January and uncertainty regarding tax refunds, indicating that the economy is well poised to gain in the long run.
History shows that the stock market tends to make up some lost ground whenever bonds tend to outperform stocks by more than 4%, with equities rallying an average 2.1%. And we all know that this time around, the S&P Total Return Index has lost 3.9% so far in May, while the Bloomberg Barclays Aggregate U.S. Bond Total Return Index is up 0.85%. This means equities are currently underperforming bonds with a net 4.72 percentage point.
Hence, with equities set to gain, let us look at stocks that have traditionally done well during the summer, the period between the Memorial Day and the Labor Day —
Stocks Poised to Win Big This Summer
The stock that generally tends to do the best between the Memorial Day and the Labor Day is none other than Dow component Apple Inc. AAPL, per Bespoke Investment Group. Apple had posted a median gain of 13% over the last 10 summers and has moved north at least 7% in each of the last three summers.
Needless to say, Apple’s products including iPhones and Mac computers have huge demand, thanks to its loyal customer base. In fact, with nearly $110 billion in cash, the company recently announced its seventh annual dividend hike and a $75-billion stock buyback. Undoubtedly, these are signs that the company continues to be fundamentally stable. In the past 60 days, the company has seen nine earnings estimates move up, while three moved down for the current year. The Zacks Consensus Estimate for earnings rose 0.6% in the same period. Apple has slightly outperformed the broader S&P 500 index so far this year (+12.9% vs +12.0%).
The Cooper Companies, Inc. COO, by the by, ranks second with a median gain of 12.1% during the summer periods, followed by Alexion Pharmaceuticals, Inc.’s ALXN 11.4% and NVIDIA Corporation’s NVDA 10.8%.
Cooper Companies is poised to gain from an expanding product portfolio and increasing penetration in international markets. The Zacks Consensus Estimate for its current-year earnings rose almost 4% in the last 90 days. Similarly, Alexion’s Soliris maintains momentum and the label expansion of the drug continues to boost sales. The Zacks Consensus Estimate for its current-year earnings went up 1.1% in the last 60 days.
And when it comes to NVIDIA, the company is gaining decent market share on growth opportunities in ray-traced gaming, rendering, high-performance computing, AI and self-driving car segments. It’s worth mentioning that NVIDIA, in particular, has an average four-quarter positive earnings surprise of 6.2%.
Nonetheless, shares of Cooper Companies, Alexion and NVIDIA have gained a healthy 12.6%, 28.4% and 7.4%, respectively, on a year-to-date basis.
Last but not the least is Amazon.com, Inc. AMZN, whose median gain may not be as strong as Apple or NVDIA, but the e-commerce giant’s shares hasn’t fallen once from Memorial Day to Labor Day over the past decade. Amazon registered a median gain of 8.9% in the last 10 summers.
It is now worth almost $1 trillion, not only due to growth in the e-commerce segment but also because of its lucrative advertising business and strong cloud hold. Amazon has become the third-biggest seller of digital advertising in the United States, after Alphabet Inc. GOOGL and Facebook, Inc. FB. And its advertising business has been one of the key profit-growth drivers over the last year. Lest we forget, Amazon generated $10.1 billion in advertising revenues last year, which was nearly 4.3% of its total revenue base. In fact, advertising revenues soared 95% from the year earlier.
Amazon is also the undisputed leader in cloud computing, with a 70%-plus market share. The company had claimed that its Amazon Web Services, the company’s cloud-computing operation, has been providing maximum growth in recent times.
And with Apple being a major customer for its cloud platform, it can easily maintain the trend of promising results in the days to come. This is because CNBC recently reported that Apple is spending more than $30 million a month on Amazon’s cloud despite building its own data storage device.
The Zacks Consensus Estimate for its current-year earnings has advanced 0.5% in the last 90 days. Amazon has outpaced the broader S&P 500 index so far this year (+22.3% vs +12.1%).
All these aforesaid top-performing summer stocks, incidentally, possess a solid Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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