Bull Run to Continue in Q2: 5 Top-Ranked Growth Picks

After witnessing exponential rise throughout 2017, U.S. stock markets have entered into correction territory in the first quarter of 2018. Market volatility reared its ugly face in February due to high inflationary expectations that aggravated in March primarily due to President Trump’s tariff policies and the tech stock plunge, which occurred due to certain company-specific issues.

However, strong economic fundamentals of the United States suggest that the recent volatility may be transitory and that markets will continue their uptrend. Strong consumer and business sentiments together with business-friendly policies and solid earnings should pave the way for a bull run in stock markets in the second quarter of 2018. Consequently, it makes sense to pick good growth stocks to enrich your portfolio.

Solid Earnings Momentum

Earnings momentum is expected to continue in the first quarter of 2018 buoyed by strong economic fundamentals. Total earnings of the S&P 500 index is expected to be up 15.9% from the same period last year backed by 7.3% year-over-year growth in revenues.

Moreover, for the second quarter of 2018, total earnings for the S&P 500 index are projected to be up 17.9% from the year-earlier level driven by 7.2% higher revenues. (Read More: Handicapping the Q1 Earnings Season)

Trade War Fears Overblown

On Mar 9, President Trump imposed tariffs of 25% on steel 10% on aluminum. This was shortly followed by another $60 billion worth of tariffs on Chinese imports.  Investors feared that the planned U.S. trade actions would likely trigger a trade war, hurting the domestic economy.

However, newly introduced tax-reforms and deregulation policies are likely to more than offset the cost of tariffs. The corporate tax rate was lowered from 35% to 21%. Moreover, repatriation of income will be taxed 8% to 15.5%, instead of the current 35%. And if this not encouraging enough for business, Trump has also promised removing 75% of the regulations during his tenure. His business-friendly policies ought to help the economy grow over the long run.

Healthy Consumer & Business Confidence

For March 2018, the Conference Board's measure of consumer confidence index stands at 127.7 compared with 130.0 in February, which was the highest in 18 years. Further, new orders for durable goods increased 3.1% in February after declining for two straight months.

Orders for non-defense capital goods, excluding aircraft, grew 1.8%, reflecting the biggest gain in five months. Core capital goods shipments increased 1.4%, best improvement noted since December 2016.

GDP Trends Likely to Remain Strong

On Mar 21, the Fed raised its GDP growth forecast for 2018 to 2.7% from 2.5% in December 2017. Likewise the 2019 GDP estimate has been hiked to 2.4% from 2.1% in December 2017. PCE inflation is projected at 1.9%, which is lower than the central bank’s longer-run estimate of 2%.

This indicates that the recent hyper-sensitivity to inflationary expectation is uncalled for. A recent survey among economists by the Wall Street Journal pointed at a rise of 2.8% in GDP growth for 2018.

Our Top Picks

Rising durable goods orders are normally associated with stronger economic activity. Moreover, a earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the months to come. Consumer spending accounts for about 70% of U.S. economic activity.  Consequently, the economy will witness strong growth.

At this stage, investment in stocks with strong growth potential will be lucrative. Our selection is backed by a good Zacks Growth Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, we narrowed down our choices with the help of our new Style Score System.

Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Growth-investing space.

We have picked five stocks each of which carries a Zacks Rank #1 and a Growth Score A.

Chart below shows price performance of our five picks in last six months.

 

PDC Energy Inc. PDCE is engaged in acquiring, developing and exploring crude oil, NGLs and natural gas. It has operations primarily in the Western and Eastern regions of the United States. PDC Energy has expected earnings growth of 169% for the current year. The Zacks Consensus Estimate for the current year has improved 27% over the last 30 days.

SMART Global Holdings Inc. SGH is a designer, manufacturer and supplier of electronic subsystems to OEMs. SMART Global has expected earnings growth of 174.8% for the current year. The Zacks Consensus Estimate for the current year has improved 24.7% over the last 30 days.

Vectrus Inc. VEC engages in providing infrastructure asset management, logistics and supply chain management, and information technology and network communication services. Vectrus has expected earnings growth of 37.8% for the current year. The Zacks Consensus Estimate for the current year has improved 27.2% over the last 30 days.

Stoneridge Inc. SRI is an independent designer and manufacturer of highly engineered electrical and electronic components. Stoneridge has expected earnings growth of 24.8% for the current year. The Zacks Consensus Estimate for the current year has improved 18.1% over the last 30 days.

KB Home KBH constructs and sells a variety of new homes designed primarily for first-time, move-up and active adult homebuyers. KB Home has expected earnings growth of 45.4% for the current year. The Zacks Consensus Estimate for the current year has improved 12.1% over the last 30 days.

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Vectrus, Inc. (VEC) : Free Stock Analysis Report
 
Stoneridge, Inc. (SRI) : Free Stock Analysis Report
 
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SMART Global Holdings, Inc. (SGH) : Free Stock Analysis Report
 
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