2017 has been a banner year for the U.S. stock market and the trend is likely to continue next year. The tax reform will act as a major driving factor for stocks coupled with strong corporate earnings and accelerating economic growth in many parts of the world.
As Christmas tree symbolizes good tidings, let’s build a similar tree for stock-loving investors that could rake in big gains in 2018.
Starting with the base – the most valuable portion of the tree – the technology sector seems to be a perfect fit here as it is placed in the top 6% among the 16 broad Zacks sectors. Within the Industry classification, Semiconductor – General is expected to outperform. Being a cyclical sector, it tends to move higher with market rallies. New areas such as autonomous cars, cloud computing, gaming, wearables, VR headsets, drones, virtual reality devices, Internet of Things (IoT) and artificial intelligence continued to fuel exceptional growth.
Intel INTC having a Zacks Rank #1 (Strong Buy) seems an excellent pick. The stock saw solid earnings estimate revision of 19 cents for the next year over the past 90 days and falls in the Industry having a Zacks Rank in the top 1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stocks that can form the leaves of the tree are Westlake Chemical Corporation WLK from the basic materials sector and Acco Brand Corporation ACCO from industrial products sector. Both the sectors are expected to benefit from Trump’s pro-growth policies, especially big spending in infrastructure and thus carry a sector Rank in the top 13%.
Westlake Chemical has a Zacks Rank #1 and is part of an industry with a Rank in the top 10%. It has seen solid earnings estimate revision of $1.32 for the next year over the past 90 days with an expected growth rate of 21.67%. On the other hand, Acco Brand saw positive earnings estimate of 4 cents for the next year over the past 90 days, with an expected earnings estimate of 6.98%. It has a Zacks Rank #2 (Buy) and Industry Rank in the top 1%.
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For the top layer, we have selected the energy sector, which is expected to be the largest contributor to 2018 S&P 500 earnings with 33.3% growth. HollyFrontier Corporation HFC seems an intriguing pick in this sector having a Rank in the top 25%. The stock saw solid earnings estimate revision of 79 cents for the next year over the past 90 days with an expected earnings growth rate of 20.87%. It has a Zacks Rank #1 with an Industry Rank in the top 20%.
At the very top is the star stock of 2017 with a Zacks Rank #1. XOMA Corporation XOMA has soared nearly 692% this year so far with room for more upside next year. The Zacks Consensus Estimate for 2018 has moved up from a loss of $1.31 to a loss of 42 cents. Rising earnings estimates indicate analysts’ optimistic view on earnings, indicating higher chances of outperformance. Additionally, the stock boasts a solid Industry Rank in the top 45%.
Now that we are done with the tree’s structure, it’s time to decorate it with bells, candies, lights and chocolates. For these, we can concentrate on areas expected to benefit most from the tax reform.
Bells and candies could be the companies that are poised to benefit from tax policies to bring offshore cash home at reduced tax. The top five U.S. hoarders are from the tech sector – Apple AAPL, Microsoft MSFT, Cisco CSCO, Alphabet GOOGL, and Oracle ORCL – that hold 88% of their money overseas, according to Moody’s. Drug makers like Amgen Inc. AMGN, Gilead Sciences GILD, Pfizer PFE and Merck & Co. MRK also stash huge cash offshore and are likely to gain from tax repatriation policy. All these stocks have a Zacks Rank #3 (Hold).
Banking stocks could be the fairy lights on the tree that will light up on the dual tailwinds of rising rates and tax cuts. According to Keefe, Bruyette & Woods, tax cuts will add 16% to median bank earnings in 2018 and 18% in 2019 while AB Bernstein sees earnings per share jumping 12-20% at large banks and 15-25% at mid-caps banks in 2018. While there are several choices, The Bank of New York Mellon Corporation BK currently has a Zacks Rank #2 and Industry Rank in the top 34%. The company is expected to generate double-digit earnings growth next year.
Small cap stocks that pay the highest effective tax rate could be the sweet treats, as these will be the biggest beneficiaries of the corporate tax cut. According to Thompson Reuters data, companies in the Russell 2000 pay a median effective tax rate of 31.9%, while larger multinationals in the S&P 500 pay 28% and 30 mega-cap stocks in the Dow Jones Industrial Average pay 23.8%. Additionally, these tend to outperform in a rising rate environment. Given this, a spread of top-ranked stocks with 2018 double-digit earnings growth potential include Upland Software, Inc. UPLD, Farmers & Merchants Bancorp Inc. FMAO, Geopark Ltd GPRK and PetMed Express Inc. PETS. All these stocks doubled this year.
And voila, the tree is up! May it bring in bountiful returns for investors with the jingle of Santa’s bells.
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