Wall Street Finishes Q3 At Record High: Top 5 Gainers

Hurricanes, tensions with North Korea and even the high-profile cyber thefts at Equifax (NYSE:EFX) and the Securities and Exchange Commission failed to rein in the equity market’s nine-year Bull Run. U.S. stocks, in fact, wrapped up third quarter on a high note, with most of the major indices scaling fresh intraday highs.

Solid second-quarter earnings results on steady economic growth helped stocks rally higher. The economy expanded after stable jobs growth encouraged households to spend more. Small-caps, in the meantime, bounced back on renewed optimism that President Trump will reach a deal to significantly slash U.S. corporate taxes by the end of the year. Persistent bickering in Washington had earlier weighed on reform hopes.

Banking on such bullish trends, it seems prudent to take a look at the best performers of the third quarter. Such stocks are fundamentally strong enough to gain further in the final quarter of this year.

Major Indices Post Solid Quarterly Gains

The 30-stock Dow Jones industrial average rallied 1,055 points or 4.9% in the July-through-September quarter. Such gains helped the blue-chip index post its first eight-quarter winning streak in 20 years. The current streak commenced during the first three months of 2015 and gained momentum after last fall’s Presidential election.

The S&P 500, a broad stock index made up of some of the large-cap U.S. stocks, gained 3.7% in the quarter. This helped the S&P 500 register eight consecutive quarters of gains for only the fifth time since inception. Almost all the sectors of the benchmark index ended in the green. The gains were powered by an 8% rise in the technology sector. In fact, the sector remains this year’s best performer, up 25%. Investors were willing to pay more for earnings and revenue growth that tech stocks primarily offer. Needless to say, as tech investors were rewarded, the Nasdaq composite continued its market leadership role with a 5.8% quarterly rise. The tech-laden index posted its fifth straight positive quarter since 2015.

The third quarter also saw resurgence in the energy group that rose 6% in the quarter, boosted by a sharp rise in oil prices. Brent crude, in particular, has risen by a fifth to $57.41 in the quarter, its first positive quarter this year. Oil prices gained traction as both OPEC and non-OPEC members including Russia agreed to cut production.

Financial stocks also roared back to life, climbing 4.8% in the quarter. Banks, lately, have benefitted from rise in long-term Treasury yields and hopes that the Federal Reserve will hike rates in December. The Fed is widely expected to start reducing its massive portfolio of Treasuries and mortgage-backed securities after its two-day policy meeting that ended on Sep 20. The bond sell-off drove the long-term Treasury yields higher. The 10-year Treasury yield traded near 2.33% on Sep 29, its highest level since Jul 13.

Earnings Season Solid, Economic Growth Revised Up

Largely, bullish sentiments toward stocks were aided by upbeat second-quarter earnings results. Total Q2 earnings for the S&P 500 index were up 11.1% from the same period last year on 5.5% higher revenues. This marked the second straight quarter of double-digit growth. Earnings growth is also expected to turn positive in Q3. Total Q3 earnings are poised to be up 3.2% from the same period last year on 5% higher revenues (read more: Handicapping the Q3 Earnings Season).

The resilience of the domestic economy has provided a fillip to U.S. corporate profits. The memory of a nominal 1.4% growth in the first quarter is fading, with the economy expanding 3.1% in the second quarter. The upward revision from the 3% growth rate reported last month reflected an uptick in consumer spending levels on strength in the labor market.

Small-Caps Gain on Tax Reform Plan by Republicans

The Russell 2000 index of small-caps was up 5.4% in the third quarter. After hitting a low for the year on Aug 21, the index moved north as the Trump administration reinforced their push for a major corporate tax overhaul by the end of December. Trump has urged Congress to move fast with the lowering of corporate taxes and had recently held a bipartisan group of House members at the White House to discuss a tax deal.

While a low corporate tax will benefit businesses of all sizes, small companies will see the maximum improvement in the bottom line. This is because, unlike top-tier companies, they are unable to shift cash to overseas jurisdiction to avoid hefty domestic tax rates. Companies in the Russell 2000 index pay a median tax rate of 31.9%, whereas multinationals in the S&P 500 shell out a median tax rate of 28%. The 30 mega-caps in the Dow pay a median tax rate of 23.8%, per Thomson Reuters data.

Sandy Villere, a co-portfolio manager of the $300-million Villere Balanced Fund, also added that investors are placing their bets on small-caps as they are much cheaper than their large-capitalized peers.

5 Best-Performing Stocks of Q3

Considerably strong earnings results powered large-caps in the third quarter, while the return of Trump Trade helped small-caps gain traction. We have, thus, selected five stocks that have not only gained immensely in the third quarter but also have the potential to move further north.

These stocks sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). Such stocks also boost 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.

Zagg Inc (NASDAQ:ZAGG) designs, produces and distributes professional product solutions for mobile devices. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 3.7% over the last 60 days. The company gained 82.1% in the third quarter, while its expected growth for the current quarter is 18.4%.

The Chefs' Warehouse, Inc. (NASDAQ:CHEF) , together with its subsidiaries, distributes specialty food products in the United States. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 10.8% over the last 60 days. The company gained 48.5% in the third quarter, while its expected growth for the current quarter is 42.9%.

Micron Technology, Inc. (NASDAQ:MU) provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. Micron Technology has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings surged 26.5% over the last 60 days. The company gained 31.7% in the third quarter, while it’s expected growth for the current quarter is 573.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Just Energy Group Inc. (TO:JE) , through its subsidiaries, provides electricity, natural gas, and renewable energy solutions in the United States and internationally. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings gained more than 100% over the last 60 days. The company gained 10.9% in the third quarter, while it’s expected growth for the current quarter is 122.2%.

BOK Financial Corporation (NASDAQ:BOKF) provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings advanced 2.7% over the last 90 days. The company gained 5.9% in the third quarter, while its expected growth for the current quarter is 20.7%.

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