5 Best Performing Top-Ranked Stocks Of Q1

Markets set a fierce pace of gains over the first quarter, buoyed by a combination of economic strength, bullish earnings forecasts and optimism over the Trump administration’s policy initiatives. Oil stocks have been the only losers over the period, plagued by oversupply and concerns over the sustainability of the OPEC led output cut agreement. The tech sector and semiconductors in particular have been the leading gainers for the first quarter.

Remarkable Q1 Performance

During the first quarter, the Dow and Nasdaq gained 4.5% and 9.8%, respectively. The S&P 500 recorded a gain of 5.5%, its strongest first-quarter performance since 2013. Benchmarks ended in the green for the quarter, backed by a Trump-led rally. However, U.S. oil prices recorded their worst quarterly loss of 5.7% since late 2015, pressured by oversupply of crude in the global market.

This was in sharp contrast to stocks’ losses over the month of March. Over last month, the Dow and S&P 500 declined by 0.7% and 0.8% respectively. In contrast, the Nasdaq posted a 1.5% increase. The first-quarter rally slowed this month, after Trump's presidency took a hit following the failure to secure adequate votes to pass a Republican-led Healthcare bill through the House of Representatives.

Blistering Gains in January & February

The quarter’s gains were built on the strong advances witnessed in January and February. In January, the Dow, S&P 500 and Nasdaq increased 0.5%, 1.8% and 4.3%, respectively. This was the third consecutive round of monthly gains for the major benchmarks. Forecasts for an improvement in economic growth and bullish corporate earnings propelled US stocks to log their first gains in January in five years. (Read: 5 Best Performing Stocks of January)

February’s gains were even stronger with the Dow, S&P 500 and Nasdaq gaining 4.8%, 3.7% and 3.8%, following continuing optimism about President Trump’s economic agenda. In particular, his promise to bring back millions of jobs to the U.S. caught investors’ imagination. (Read: 5 Best Performing Stocks of February)

Failure to Pass New Healthcare Bill

The Trump administration suffered a major setback after a healthcare bill intended to repeal and replace Obamacare was being pulled from the House floor on Mar 24 when it became clear that there would not be enough votes to pass the bill. The House was initially scheduled to vote on the new law on Thursday but the vote was postponed amid concerns regarding the bill garnering enough support. However, even after a lot of discussion and negotiations, it became clear that the bill would not get enough support.

As a result, the S&P 500 recorded its worst weekly decline of the year, while the Dow registered its steepest decline since last September. The failure of the passage of the healthcare bill had an adverse effect on investor sentiment which eventually led benchmarks to finish in the red.

Bullish Economic Data

Despite rising skepticism about the Trump trade’s sustainability, economic data has remained encouraging throughout. This has provided a firm fundamental basis for recent gains. The ISM Manufacturing Index has risen over all three months of the concluded quarter while its services counterpart has also closed the period higher. Retail sales has also experienced a similar trend, though its last increase of 0.1% has been relatively muted.

Meanwhile, the Fed’s preferred measure of inflation, the PCE price Index has also notched up consistent gains. The quarter’s final PCE reading depicts a 2.1% year over year increase. Meanwhile, core PCE has risen 1.8% over the same period, clearing the decks for further rate hikes this year. Housing witnessed some sluggishness as the sector progressed, but ultimately ended the quarter on a positive note.

GDP Rises, Unemployment Falls

The U.S. economy registered growth of 2.1% in the fourth quarter of last year. Consumer spending, which accounts for more than two-third of the economic activity was revised upward, gained 3.5% over the quarter. Moreover, corporate profits increased, signifying that the economy has entered 2017 on a strong note.

Employers added almost half a million jobs in the first two months of 2017, the best back-to-back performance since last summer. February witnessed 235,000 new jobs additions. The unemployment rate fell to 4.7% in February from 4.8% in January. Meanwhile, wages for American workers increased 0.2% in February to $26.09 an hour. (Read: 5 Stocks to Buy as Consumer Confidence Hits 16-Year High)

Tech Highest Gainer, Semiconductors Shine

The Technology Select Sector SPDR XLK has gained 10.2% over the first three months of the year, emerging as the best performing industry of the first quarter. The S&P 500 Information Technology Sector has gained around 12.5%, emerging as the biggest beneficiary of the Trump rally.

On the campaign trail, Trump promised to cut taxes, reduce regulations and allow the repatriation of corporate funds held overseas. The tech sector was expected to gain from Trump’s policy initiatives, given that several tech heavyweights have substantial funds parked overseas. (Read: 5 Terrific Tech Stocks to Boost Your Portfolio Returns)

Meanwhile, the promise to cut corporate tax rates from 35% to 15% is likely to increase the attractiveness of the U.S. as a business destination and free up funds for investment purposes. Additionally, tech stocks are perceived to be less susceptible to tax and interest rate changes.

The biggest gainers for the tech sector have been semiconductor stocks. Rising demand for chips across a range of industries have been helping these stocks move upward. Over the last one year, the Philadelphia Semiconductor Index, which consists of several industry majors, has gained nearly 50%.

Oil Ends in the Red

In contrast, the Energy Select Sector SPDR XLE (NYSE:XLE) has lost 7.2% over the first quarter, the only sector to close in the red over this period. Oil prices ended the quarter on a three week high, but lost nearly 6% over the period. Market watchers have raised questions about whether or not the OPEC-led output cut is at all sustainable.

For the first couple of months of 2017, oil prices found themselves locked in a sideways trading range, as the tug-of-war over two powerful, opposing supply narratives continued. Reports indicated an impressive 90% compliance level from the OPEC producers who pledged output cuts in an effort to tackle the three-year supply glut.

And then prices broke below the psychologically important $50 threshold after U.S. government data showed that supplies – building since the beginning of the year – rose to record levels amid an increase in production. At over 530 million barrels, current crude supplies are up 6% from the year-ago period and are at the highest level since the EIA began keeping records in 1982. (Read: Oil & Gas Industry Outlook - March 2017)

Ultimately, a bearish view has emerged about the commodity with noncompliance of the OPEC output cut agreement becoming increasingly evident. Volumes across major oil producers such as Venezuela and Saudi Arabia continue to be substantial.

Record Q4 Earnings, Q1 Outlook Encouraging

Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record. The strong Q4 performance came after the first positive earnings growth in 2016 Q3, having declined in each of the preceding 5 quarters. Total earnings increased by +7.3% in Q4, on +4.7% higher revenues. (Read: Q1 Earnings Season Preview)

The outlook for Q1 seems to be similarly encouraging. Total Q1 earnings are expected to be up +6.4% from the same period last year on +6.4% higher revenues. This would follow +7.3% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years. (Read: Q1 Earnings Season Preview)

Fed Hikes Rate, Takes Conservative Stance

At the end of their two-day policy meeting in March, Fed Chair Janet Yellen and her colleagues lifted a key interest rate for the second time in three months. Citing an improving labor market and greater confidence in consumers, the Fed raised its federal funds rate to a range of 0.75% to 1%. The policy rate rose by 25 basis points to 1% for the first time in a decade.

Future rate hike expectations scaled higher as well. The Fed’s “dot plot,” a table of policymakers’ projections for short-term interest rates, also penciled two rate hikes for this year and three in 2018. However, bank shares reacted adversely way, indicating that investors have been expecting an even more aggressive rate hike forecast. (Read: 5 Biggest Winners from the Fed Rate Hike)

5 Star Performers for Q1

I ran a screen on Research Wizard for companies with the following parameters:

(Click here to sign up for a free trial to the Research Wizard today):

1. Percentage price change over the last 12 weeks greater than or equal to 20%
2. Forward price-to-earnings ratio (P/E) for the current financial year (F1) less than or equal to 20. This picks out stocks that are good value choices
3. Expected earnings growth for the current financial year greater than or equal to 20%
4. Zacks Rank equal to 1: This ascertains stocks that have shown above-average returns over the last 26 years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

(See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).

Here are the top 5 stocks that made it through this screen:

Applied Optoelectronics, Inc. (NASDAQ:AAOI) designs, develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers.

Price gain over the last 4 weeks = 142.7%

Applied Optoelectronics’ expected earnings growth for the current year is more than 100%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.88, lower than the industry average of 18.60.

The Chemours Company (NYSE:CC) is a provider of performance chemicals on a worldwide basis.

Price gain over the last 4 weeks = 74.4%

Chemours’ expected earnings growth for the current year is more than 100%. The stock has a P/E (F1) of 13.28x, compared to the industry average of 17.10.

Ultra Clean Holdings, Inc. (NASDAQ:UCTT) is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries.

Price gain over the last 4 weeks = 55%

Ultra Clean Holdings has a P/E (F1) of 14.26x, compared to the industry average of 22.18. The stock’s expected earnings growth for the current year is 82.1%.

Triton International Ltd (NYSE:TRTN) offers acquisition, leasing, re-leasing and sale of intermodal containers.

Price gain over the last 4 weeks = 46.2%

Triton’s expected earnings growth for the current year is more than 100%. The stock’s has a P/E (F1) of 13.07x, compared to the industry average of 13.45.

ADVA Optical Networking SE ADVOF is a developer, manufacturer and seller of optical and Ethernet based networking solutions.

Price gain over the last 4 weeks = 39.1%

ADVA Optical Networking has a P/E (F1) of 13.38x, compared to the industry average of 14.57. The stock’s expected earnings growth for the current year is 70%.

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