5 Top-Ranked Dow Stocks To Buy For 2018

As markets approach the end of an extremely successful year, each of the major benchmarks is nearing ever-new milestones. Currently up more than 25% year to date, the Dow is on course for its best yearly performance since 2013. If the blue-chip index maintains its current trajectory and gains more than 26.5%, it will have registered its best annual performance since 1995. During that year, the Dow had gained 33%.

The index’s blue-chips have not looked this attractive for some time now. And fueling these gains has been a combination of strong earnings and steady economic growth, factors which are likely to hold good in 2018. Adding strong performers from the Dow to your portfolios could help you garner handsome profits in the year ahead.

Benchmarks Near Multiple Milestones

The other major benchmarks are also well on course to create milestones of their own. For instance, the S&P 500 has increased more than 20% this year and is on course to registering its highest gains in four years. Meanwhile, the Nasdaq has surged ahead, gaining almost 30% during a year when tech stocks really came into their own.

Such stellar gains came amid an atmosphere of relative calm. Notably, the S&P 500 has not suffered even a 3% decline at any point since Trump won the presidential elections. Not only is this the longest such period ever recorded, it has come at a time when the market’s fear gauge, the VIX, has plummeted to record lows.

Strong Economy, Bullish Earnings Boost Bourses

Powering this extended stretch of furious gains has been a combination of steady economic growth and impressive earnings results. According to the Department of Commerce’s third and final estimate, U.S. GDP increased by 3.2% in the third quarter, the best pace recorded since the first quarter of 2015.

Meanwhile, the economy added an impressive 228,000 new jobs in November even as the unemployment rate remained at a 17-year low. These readings indicate that the labor market is at its strongest since the start of the 21st century.

And accompanying this strong set of economic indicators have been stellar earnings results, a trend which is also likely to continue. Currently, total Q4 earnings are expected to be up 8.8% from the same period last year on 6.8% higher revenues, which would follow the 6.9% earnings growth on 6% higher revenues in Q3. Also, for the full-year 2017, total earnings for the S&P 500 index are expected to be up 7.5% on 5% higher revenues. (Read: What Will the Q4 Earnings Season Bring?)

Could Tax Cuts Actually Spoil Markets’ Party?

With Trump scoring his first legislative victory, investors are now looking at tax cuts to provide a further fillip to the bourses. The exact earnings impact of the tax legislation is yet to become clear, but preliminary estimates suggest a material earnings boost. S&P 500 earnings in 2018 are already expected to be up +11.8%, with the growth pace expected to roughly double as a result of the tax legislation. (Read: Earnings Boost from the Tax Legislation)

But a section of market watchers feel that additional stimulus could actually be counterproductive for an economy which is almost at full capacity and is experiencing near-full-employment levels. Such a scenario has been maintained in an ultra-low rate environment characterized by steadily sluggish inflation.

However, tax cuts could finally trigger higher inflation, which in turn could force the Federal Reserve to initiate faster and sharper rate hikes. Such an outcome would end the goldilocks style phase which the economy has been enjoying, making 2018 a much tougher year than was earlier hoped for. Critics of such a view point out that marginally higher inflation could actually be more beneficial for growth and provide the economy with further room for expansion.

5 Dow Winners

The Dow is on course to record its best yearly performance since 2013. Powering this stretch of gains have been strong earnings results and steady economic growth, factors which remain firmly in place. Meanwhile, recently enacted tax cuts are likely to boost fourth quarter earnings even higher.

Investing in select Dow stocks looks like a smart option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics. Each of these stocks has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Caterpillar Inc. (NYSE:CAT) has recently delivered strong third quarter earnings results. The better-than-expected performance can be attributed to surprisingly strong demand for its construction equipment in North America, robust sales in China, improvement in other markets as well as disciplined cost-control efforts.

Caterpillar has expected earnings growth of 88.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 30 days. Caterpillar has returned 67.9% year to date, outperforming the industry it belongs to, which has gained 65.8% over the same period.

(Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

Wal-Mart Stores, Inc. (NYSE:WMT) also delivered stellar third quarter numbers, driven by its constant expansion efforts and splendid e-commerce performance.

Wal-Mart has expected earnings growth of 2.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 60 days. Wal-Mart has returned 42.1% year to date, outperforming the industry it belongs to, which has gained 33.1% over the same period.

Microsoft Corporation (NASDAQ:MSFT) has registered strong third quarter results with both earnings and revenues exceeding expectations. Its enterprise refresh cycle, new subscription model, Azure and promising new products will continue to generate sizeable cash flows.

Microsoft has expected earnings growth of 2.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 4% over the last 60 days. Microsoft has returned 37.6% year to date, outperforming the industry it belongs to, which has gained 35.8% over the same period.

3M Company (NYSE:MMM) continues to deliver sustainable increase in earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs.

3M has expected earnings growth of 11.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days. 3M has returned 31.5% year to date, outperforming the industry it belongs to, which has lost 4.6% over the same period.

Intel Corporation (NASDAQ:INTC) is benefiting from robust performance of the Data Center Group, Internet-of-Things Group, Non-Volatile Memory Solutions and Programmable Solutions Group. Its leading position in PCs, strength in servers, growing position in software and IoT segments and headway in process technology are all positive indicators of its future growth.

Intel has expected earnings growth of 19.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days. Citizens Financial Services has returned 28.8% year to date, underperforming the industry it belongs to, which has gained 46.7% over the same period. However, over the last three months it has gained 24.4%, outperforming the industry’s gain of 19%.

Zacks Editor-in-Chief Goes "All In" on This Stock

Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.

Download it free >>

Microsoft Corporation (MSFT): Free Stock Analysis Report

3M Company (MMM): Free Stock Analysis Report

Caterpillar, Inc. (CAT): Free Stock Analysis Report

Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report

Intel Corporation (INTC): Free Stock Analysis Report

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