An Oversold Wall Street Rallies Despite Bad News: 5 Top Picks

On Mar 26, news of two extremely unfortunate scenarios surfaced. First, the Department of Labor reported that initial jobless claims by Americans jumped to a historic high 3.28 million for the week ended Mar 21, on account of the coronavirus-induced lockdown. Second, the number of people affected by the deadly virus in the United States surpassed China and Italy with the death toll crossing 1,000.

Yet, at the end of yesterday's trading session, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 6.4%, 6.2% and 5.6%, respectively. Notably, the Dow and the S&P 500 posted three consecutive days of gains for the first time since Feb 6 and 12, respectively.

In fact, in the last three days, the Dow surged 21.3% — best three-day stretch since 1931. The S&P 500 climbed 17.6%, reflecting its best three-day streak since 1933. Meanwhile, the Nasdaq Composite advanced 13.7% in the last three days.

Bad News Generates Rally in a Highly Oversold Market

The market has been so oversold in the past five weeks that even a bad news, except for the worst case scenario, will not deter market participants from buying good stocks at an attractive valuation. This is because the bad news is already factored in or priced in market valuation. 3.28 million of jobless claims were better compared with more than 4 million expected by some industry researchers.

In fact, in the near future, we may witness several bad news and economic data. A large number of analysts have already predicted that the second quarter U.S. GDP will decline by more than 20%. We may see several weak estimates for other metrics also. However, the stock market recovery will not cease unless the actual data represents the worst case scenario.

This is primarily because of extremely low stock market valuation owing to overselling, mostly panic selling due to the unprecedented non-financial hazard to global financial markets. The Dow, the S&P 500 and the Nasdaq Composite are still down 23.7%, 22.3% and 20.7%, respectively, from their all-time highs recorded in last month, even after the historic rally of last three days.

Good News Drives Market Rally

Aside from the bad news, some good news has also surfaced. The U.S. government and the Fed have already decided upon unprecedented fiscal and monetary packages worth more than $6 trillion together. Moreover, the central bank has reduced the Fed fund rate to 0-0.25%.

Beside United States, internationally another $5 trillion of stimulus is expected to be generated in next few weeks. Several important members of the Eurozone, the U.K., Japan and China entered this league. Furthermore, prominent emerging economies like Singapore, India and Malaysia are also injecting large sums of money to restore the sagging global economy.

Upward Revision of EPS Estimates: A Crucial Indicator

An upward earnings per share (EPS) estimate revision for 2020 of any stock simply means the market is expecting these companies to do good business this year. However, in the past 30 days most stocks witnessed either negative EPS revisions or remained flat due to coronavirus pandemic.

Meanwhile, a positive EPS estimate revision during the period of historic financial turmoil highlights solid business model and robust growth potential of these companies. Investors can certainly take a look at this stocks at the moment.

Our Top Picks

We have narrowed down our search to five large-cap stocks with positive EPS estimate revision in either last seven or 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

Microsoft Corp. (NASDAQ:MSFT) is one of the largest broad-based technology providers in the world. It dominates the PC software market with more than 80% of the market share for Windows operating systems.

The company has an expected earnings growth rate of 18.5% for the current year (ending June 2020). The Zacks Consensus Estimate for the current year has improved by 0.2% over the past seven days. The stock price is still 18.1% below its 52-week high.

Amazon.com Inc. (NASDAQ:AMZN) is engaged in the retail sale of consumer products and subscriptions in North America and internationally. It operates through three segments: North America, International, and Amazon Web Services. It sells merchandise and content purchased for resale from third-party sellers through physical and online stores.

The company has an expected earnings growth rate of 19.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.3% over the past seven days. The stock price is still 10.5% below its 52-week high.

Leidos Holdings Inc. (NYSE:LDOS) provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally. It operates through three segments: Defense Solutions, Civil and Health.

The company has an expected earnings growth rate of 9.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the past seven days. The stock price is still 26.4% below its 52-week high.

Costco Wholesale Corp. (NASDAQ:COST) operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. It offers branded and private-label products in a range of merchandise categories.

The company has an expected earnings growth rate of 6.8% for the current year (ending August 2020). The Zacks Consensus Estimate for the current year has improved by 0.3% over the past seven days. The stock price is still 10.1% below its 52-week high.

MarketAxess Holdings Inc. (NASDAQ:MKTX) is a leading multi-dealer trading platform that offers institutional investors access to global liquidity in products like U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds credit derivatives and other fixed-income securities.

The company has an expected earnings growth rate of 13.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.3% over the past 30 days. The stock price is still 16.3% below its 52-week high.

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