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Top 4 Blue-Chip Stocks to Buy Despite September Volatility

The first half of September is over and the myth about the month’s volatility has already started showing up in Wall Street. Historically, September is known as the worst-performing month in Wall Street. The S&P 500 has lost 1% on average in September since 1928 to 2019, and 0.4% on average in the last 25 years.

The Dow has lost 1% on average in September since its inception and 0.3% on average in the last 30 years. The Nasdaq Composite has lost 0.5% on average in September since its inception in 1971.

However, upon taking a closer look at the Dow Index — popularly known as the blue-chip index — we find four stocks that currently hold a favorable Zacks Rank. These stocks have performed strongly this year and are likely to maintain the tempo in the near future.

Dow Lagging Its Peers Year to Date

The Dow is clearly lagging its peers this year. Although the index has climbed 53.9% from its recent low recorded on Mar 23, the S&P 500 and the Nasdaq Composite have jumped 54.5% and 66.6%, respectively, in this period. More importantly, year to date, the Dow is still down 1.8% while the S&P 500 is up 4.8% and the Nasdaq Composite has surged 23.2%.

On Aug 18, the S&P 500 surpassed its pre-pandemic all-time high posted on Feb 19. Thereafter, the index recorded its latest all-time high of 3,588.11 on Sep 2. On Jun 5, the Nasdaq Composite outpaced its pre-pandemic all-time high posted on Feb 19. Thereafter, the index recorded its latest all-time high of 12.074.06 on Sep 2. However, the Dow is yet to gain 5.5% to surpass its all-time of 29,568.57, recorded on Feb 12.

Dow Outperforms Its Peers in September

An analysis of the trading pattern of this month so far reveals that the Dow is doing relatively better than its peers. Month to date, the blue-chip index is down 1.4% while the S&P 500 — popularly known as the market's benchmark — has lost 3.3%. Meanwhile, the tech-laden Nasdaq Composite has tumbled 6.2% this month.

Notably, the technology sector pulled down the overall market in September after being the predominant driver of the impressive showing over the last five months. However, in the due course of the market's V-shaped recovery, technology stocks got overvalued, as stated by many financial experts.  

In fact, the Dow's weak performance year to date and its relatively better showing so far in September are directly related to the technology sector. The technology stocks consist of more than 50% and more than 25% of the aggregate weights of the Nasdaq Composite and the S&P 500, respectively.

However, the Dow doesn't have much concentration on the technology sector. The logic that lack of concentration on technology stocks has held the Dow back from  its peers year to date is the same logic that has helped it to stay more immune to September's volatility.

The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. These positives will set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary aside from the technology sector. Consequently, further reopening of the economy is likely to result in greater momentum for the Dow.

Our Top Picks

We have narrowed down our search to four Dow stocks with strong short-term and long-term (3-5 years) growth potential. All these stocks witnessed robust earnings estimate revisions in the last 7 to 60 days, indicating solid business prospects. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy).

The chart below shows the price performance of our four picks year to date.


salesforce.com.inc. CRM is the leading provider of on-demand Customer Relationship Management software, which enables organizations to better manage critical operations such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development.

The Zacks Rank #1 company has an expected earnings growth rate of 25.1% for the current year (ending January 2021). Its long-term growth rate is 18%. The Zacks Consensus Estimate for the current year has improved by 25.9% over the last 30 days. The stock is currently trading at an 11.9% discount to its 52-week high price of $284.5 recorded on Sep 2.  

Apple Inc. AAPL designs, manufactures and sells iPhone, iPad, iPod, Apple TV, Mac personal computers, Apple Watch, HomePod and AirPods. These devices are powered by the iOS, macOS, watchOS and tvOS operating systems.

The Zacks Rank #2 company has an expected earnings growth rate of 9.1% for the current year (ending September 2020). Its long-term growth rate is 10.7%. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 7 days. The stock is currently trading at an 18.7% discount to its 52-week high price of $137.98 recorded on Sep 2.  

Walmart Inc. WMT operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and NeighborhoodMarkets, as well as the websites, walmart.com and samsclub.com.

The Zacks Rank #2 company has an expected earnings growth rate of 7.1% for the current year (ending January 2021). Its long-term growth rate is 5.6%. The Zacks Consensus Estimate for the current year has improved 6.3% over the last 30 days. The stock is currently trading at a 10% discount to its 52-week high price of $151.33 recorded on Sep 2.  

UnitedHealth Group Inc. UNH is the largest health care services company globally, serving over 50 million individuals in the United States and over 5 million internationally. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight, and OptumRx.

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