5 Top Stocks To Buy Ahead Of A Grueling May

The U.S. stock market is about to wrap up a volatile month of April, bracing for neck-snapping gyrations from midterm elections in May. Investors, in the meantime, have time and again sold stock holdings in May to survive the seasonal decline in equity markets. This time around, May won’t be a particularly bad month for the stock market.

Among the two pillars of the U.S. economy, consumer confidence remains at elevated levels and corporate earnings growth continues to pick up. Courtesy of these positives, investors should focus on fundamentally sound companies that can make the most of the current scenario.

May is Particularly Bad in Midterm Years

May is traditionally bad in midterm years, according to the Stock Trader’s Almanac. Since 1950, the Dow Jones Industrial Average normally remains flat in May but loses 0.7% on average during midterm years. For the S&P 500, May has been the eighth best month of the year but during midterms, the broader index has seen an average drop of 0.9%. May is usually the fifth best month for the Nasdaq, however, the tech laden index slipped 1.2% on average in midterms.

This year is likely to be the same. After all, Democrats are poised to regain control over the House of Representatives even though Republicans are expected to maintain an upper hand in the Senate, based on recent polls. The Goldman Sachs Group, Inc. (NYSE:GS) forecasts that Democrats will have nearly a 70% chance of repossessing the House but there is less than 40% chance of regaining a majority in the Senate. Goldman added that such a divided government doesn’t bode well for investors.

“Sell in May and Go Away” Is a Common Agenda

The adage “Sell in May and go away” is also being widely discussed. Sell in May and go away encourages investors to sell stock holdings in May to avoid getting affected by the seasonal decline in equity markets. The strategy involves getting back into the equity markets in November, thereby evading the typical volatile May-October period.

Historically, stocks have underperformed in the six-month period commencing May and ending in October, compared to the six-month period from November to April. Mostly lower trading volumes in the summer season and substantial increase in investment during the winter months are cited to be the main reasons for this discrepancy.

Markets Have Been Trading in a Tight Range for Months

The stock market, by the way, has failed to break out from a tight range over the past several weeks. This shows that enthusiasm over equities has been dissipating and might derail the extended bull run in the near term.

Only 32.7% of investors expect stock prices to be at higher range in 12 months from now, per data by the Conference Board. This is the lowest percentage since November 2016. At the same time, 33% of respondents anticipate that stocks will be lower in a year, the highest reading since July 2016.

Stock valuations are already at multiyear highs raising questions as to whether the equity market has more room to scale higher. To top it, trading volumes have been unusually low, which indicates that investors are reluctant to participate.

Rise in inflationary pressure and a more hawkish Fed are potential headwinds for stocks, while investors continue to fret about the likelihood of an inverted yield curve that has been viewed as an indicator of a pending economic recession.

Here’s Why You Shouldn’t Sell in May

May is almost upon us, and even though there are ample of reasons to stay away from stocks, we shouldn’t be doing so from an investment standpoint. This is because the two pillars of the U.S. economy – consumers and corporates – look solid.

Consumer Confidence Rebounds Close to 18-Year High in April

U.S. economic growth in the first quarter was a little firmer than anticipated, while consumer spending slowed down sharply. Consumption came in at only 1.1% as compared with 4% in the final quarter of 2017. However, consumer confidence rebounded this month to a near 18-year high. The consumer confidence index climbed to 128.7 in April from 127 in March, per the Conference Board. And with more confidence, households are expected to bump up their spending levels.

Q1 Earnings Strongest in 7 Years

Turning to corporate America, we have entered the first-quarter earnings season. In the first quarter, total earnings are likely to increase 20% from the same period last year on 8% higher revenues. This will follow 13.4% earnings growth recorded in the fourth quarter of 2017 on 8.6% higher revenues, marking the best quarterly performance in seven years. In fact, full-year earnings are expected to be up 18.5% from the year-ago level on 5.5% higher revenues. This, if achieved, will be the highest annual growth since 2010.

5 Solid Choices

Since a ‘buy-in-May’ opportunity maybe playing out in the equity market, investing in solid stocks will be prudent. These stocks not only possess a Zacks Rank #1 (Strong Buy) but also are poised to gain significantly in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks also flaunt a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Dollar General Corporation (NYSE:DG) provides various merchandise products in the southern, southwestern, Midwestern, and eastern United States. The company has a VGM Score of B. Investors have seen 10 upward earnings estimate revisions, compared with two lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for its current-year earnings climbed 7.7% over the last 60 days. The stock’s expected earnings growth rate for the current quarter is a solid 43.7%. In fact, the company’s projected growth rate for the current year is 33.9%, while the Retail - Discount Stores industry is expected to gain only 19.5%.

Rocky Brands, Inc. (NASDAQ:RCKY) designs, manufactures, and markets footwear and apparel under the Rocky, Georgia Boot, Durango, Lehigh, and Michelin (PA:MICP) brand names in the United States, Canada, and internationally. The company has a VGM Score of A. Investors have seen one upward earnings estimate revision, compared with none lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for its current-year earnings rose 7.1% over the last 60 days. The stock’s expected earnings growth rate for the current quarter is a steady 5%. In fact, the company’s projected growth rate for the current year is 29.3%, while the Shoes and Retail Apparel industry is expected to gain 14.5%.

Koppers Holdings Inc. (NYSE:KOP) provides treated wood products, wood treatment chemicals, and carbon compounds in the United States and internationally. The company has a VGM Score of A. Investors have seen two upward earnings estimate revisions, compared with none lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for its current-year earnings jumped 4.9% over the last 60 days. The stock’s expected earnings growth rate for the current quarter is a solid 27.9%. In fact, the company’s projected growth rate for the current year is 15.5%, while the Chemical - Diversified industry is projected to gain 15.1%.

Louisiana-Pacific Corporation (NYSE:LPX) manufactures building products primarily for use in new home construction, repair and remodeling. The company has a VGM Score of A. Investors have seen two upward earnings estimate revisions, compared with none lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for its current-year earnings climbed 5.3% over the last 60 days. The stock’s expected earnings growth rate for the current quarter is a whopping 107%. In fact, the company’s projected growth rate for the current year is 19.7%, while the Building Products - Wood industry is likely to gain 18.1%.

Stoneridge, Inc. (NYSE:SRI) designs and manufactures engineered electrical and electronic components, modules, and systems for the automotive, commercial, motorcycle, off-highway, and agricultural vehicle markets. The company has a VGM Score of A. Investors have seen two upward earnings estimate revisions, compared with none lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for its current-year earnings rose 18.7% over the last 60 days. The stock’s expected earnings growth rate for the current quarter is a solid 26.3%. In fact, the company’s projected growth rate for the current year is 25.5%, while the Electronics - Miscellaneous Components industry is expected to gain 14.6%.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>