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Market to Stay Northbound Despite Volatility: 5 Growth Picks

Nalak Das

Wall Street closed sharply lower on Friday, Jun 26 as new coronavirus cases surged, forcing some U.S. states to reclose some parts of their economies. Market is witnessing severe volatility this month after back-to-back spectacular performances in April and May. Month to date, the Dow and the S&P 500 are in negative territory while the Nasdaq Composite has managed to gain a little.

The resurgence of COVID-19 raised serious doubt over the V-shaped recovery of the U.S. economy. However, a close analysis indicates that the worst of the market is long over.  Although, short-term fluctuations will continue on account of the coronavirus-induced crisis, overall market movement will remain positively sloped.

No More Full Lockdowns

All 50 states reopened in some form in the last week of May. However, as many as 24 states have reported a second wave of coronavorus infections as they relaxed social distancing norms. Consequently, Texas, Florida and California reclosed bars. Moreover, Apple Inc. AAPL reclosed 18 stores while AMC Entertainment Holdings Inc. AMC and The Walt Disney Co. DIS postponed the reopening of their theaters and theme parks.

Despite this, a full lockdown is not likely to be imposed again. On Jun 11, Treasury Secretary Steven Mnuchin said that a second round of lockdown is not a viable option as it will create more damage than combating coronavirus. On Jun 14, White House economic adviser Larry Kudlow said the economy “has got to open.” He argued that the recent surge in coronavirus cases has nothing to do with reopening but is due to an increase in the number of testing.

Even major Eurozone countries like Germany, France, Italy and Spain recorded a spike in coronavirus once they tried to reopen. Also, Asian giants like Japan, South Korea and China faced the second wave of the deadly virus. Emerging countries like India, Brazil and Singapore are all facing the same problems. But none of these countries have decided to re-impose full lockdowns.

Consequently, market is not going to see the trough of last March. Moreover, a recent pullback in stock prices will make valuations more reasonable as a section of economists and financial experts raise eyebrows about exaggerated valuation multiples of most of the stocks.
Strong Pent-Up Demand and Massive Stimulus

The Department of Commerce reported that U.S. consumer spending jumped 8.2% in May, the largest monthly increase since early 1959. The U.S. government has injected around $3 trillion in fiscal stimulus into the economy in order to protect it from the coronavirus-induced devastations.

The Trump administration's decision to give unemployment insurance and stimulus checks for retirees greatly helped in reviving consumer spending, which constitutes around 68% of the U.S. GDP.

Impressive job additions in May, a jump in retail sales and a quickly recovering housing market clearly indicate that consumer spending is gaining momentum. Moreover, the sagging U.S. manufacturing sector, which generates around 12% of the GDP, is slowly returning to its own track.

Our Top Picks

At this stage, it will be prudent to invest in stocks with strong growth potential and robust earnings estimate revisions. Growth investors are primarily focused on stocks with aggressive earnings or revenue growth, which should propel their stock price higher in the future.

We have narrowed down our search to five such stocks each carrying a Zacks Rank #1 (Strong Buy) and Growth Score A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

 

Zscaler Inc. ZS operates as a cloud security company focusing on transforming networks and applications for a mobile and cloud-first platform. The company has an expected earnings growth rate of 26.8% for next year (ending July 2021). The Zacks Consensus Estimate for next-year earnings has improved 8% over the last 30 days.

Zoom Video Communications Inc. ZM provides a video-first communications platform worldwide. Demand for its remote work platform and solutions is expected to remain robust as some form of social distancing will be required until a vaccine or any effective treatment for coronavirus is developed. The company has an expected earnings growth rate of more than 100% for the current year (ending January 2021). The Zacks Consensus Estimate for current-year earnings has improved by more than 100% over the past 30 days.

MarketAxess Holdings Inc. MKTX is a leading multi-dealer trading platform that offers institutional investors access to global liquidity in several fixed-income securities and credit derivatives. The company has an expected earnings growth rate of 31.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 1% over the last 30 days.

Fortinet Inc. FTNT is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. The company has an expected earnings growth rate of 13.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 1.4% over the past 30 days.

Vertex Pharmaceuticals Inc. VRTX is focused on the discovery, development, and commercialization of small molecule drugs targeting serious diseases. Its main area of focus is cystic fibrosis, which has huge commercial potential. The company has an expected earnings growth rate of 66.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 7 days.

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Click to get this free report Apple Inc. (AAPL) : Free Stock Analysis Report The Walt Disney Company (DIS) : Free Stock Analysis Report Vertex Pharmaceuticals Incorporated (VRTX) : Free Stock Analysis Report Fortinet, Inc. (FTNT) : Free Stock Analysis Report MarketAxess Holdings Inc. (MKTX) : Free Stock Analysis Report AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report Zscaler, Inc. (ZS) : Free Stock Analysis Report Zoom Video Communications, Inc. (ZM) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research