Why These 3 Underperformers May Rebound In 2018

Market performance has been exceptionally well this year with the major indexes touching record highs several times. So far, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite index have jumped 19.8%, 25.3% and 29.4%, respectively.

The bull run is expected to continue into next year with several analysts predicting that markets will reach new highs.

Factors Supporting the Momentum

First and foremost is the optimism surrounding improvement in the U.S. economy. At the end of its latest Federal Reserve Open Market Committee (FOMC) meeting, the Fed projected economic growth of 2.5% for 2018 (up from the prior guidance of 2.1%). A slew of favorable data including continued strengthening of the labor market, increase in household spending, lower unemployment rate and rise in business activities will support the economy.

Additionally, the implementation of tax legislation is expected to stimulate the market with more job creation and rise in inflation rate. Following the massive cuts in tax rates (from 35% to 21%) for U.S. businesses, banks and big financial institutions that are weighed down by a substantial tax load would benefit immensely. Also, the tax repatriation provision will allow tech, drug and biotech companies with global operations to bring back trillions of dollars held as cash reserve overseas, thus improving their financial health.

Further, the Fed rate hike will drive the markets. While three interest rate increases are projected next year, anticipated higher inflation may lead the central bank to move the interest rate higher at a faster pace as economic growth improves further.

Driven by the strengthening of economy, corporate earnings are expected to continue improving. Also, the companies are optimistic about the likelihood of a slash in tax rates and benefits from tax repatriation provision on their earnings.

Per the latest Earnings Outlook, the S&P 500’s earnings next year are projected to increase 11.8%, without taking into consideration any benefit from tax legislation. Notably, the growth pace is expected to increase further following the implementation of the same. Moreover, tax cuts will significantly boost earnings for small-cap companies.

Underperformers to Bounce Back in 2018

While the markets this year reached new highs, several stocks underperformed. There are chances that some of these stocks might rebound in 2018 given the favorable factors and their fundamental strength.

However, it’s not easy to pick these hidden gems among such underachieved stocks. Hence, we have taken the help of Zacks Stock Screener to make this task relatively simpler.

We have shortlisted stocks that underperformed the S&P 500 so far this year with a market capitalization of at least $1 billion and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

To further cut short the list, stocks with VGM Score of A or B and upward earnings estimate revisions of more than 5% for the next year are taken into consideration. Also, these stocks are expected to record earnings growth of 5% or more next year.

Following three stocks meet these criteria:

American Eagle Outfitters, Inc. (NYSE:AEO) operates as a specialty retailer offering on-trend clothing, accessories and personal care products. So far this year, shares of the company have rallied 19.2%.

With a Zacks Rank #2 and VGM Score of A, the stock has witnessed a 6% upward earnings estimate revision for the next year over the last 30 days. Further, the company is expected to record earnings growth of 6% for fiscal 2019.

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Donaldson Company, Inc. (NYSE:DCI) manufactures and sells filtration systems and replacement parts. The company’s shares have gained 16.3% year to date.

The stock sports a Zacks Rank #1 and has a VGM Score of A. Its earnings estimates for the next year have moved 7.2% upward in the past four weeks. Also, the company’s earnings are projected to increase at the rate of 11.7% in fiscal 2019.

Pan American Silver Corp. (NASDAQ:PAAS) is engaged in exploration, extraction, processing, refining and reclamation of silver mines. Its shares have risen just 1.3% so far this year.

With a Zacks Rank #2 and VGM Score of B, the stock has witnessed 18% upward earnings estimate revision for the next year over the last 30 days. Additionally, the company is expected to record earnings growth of 21% for 2018.

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Pan American Silver Corp. (PAAS): Free Stock Analysis Report

Donaldson Company, Inc. (DCI): Free Stock Analysis Report

American Eagle Outfitters, Inc. (AEO): Free Stock Analysis Report

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