Nasdaq Posts Longest Stretch of Gains in 2 Years: 5 Picks

Swarup Gupta

Updated July 19, 2017 at 3:11 p.m.

The tech-heavy Nasdaq staged a spectacular rebound to post its longest run of gains in two years on Jul 18. Boosted by stellar results from Netflix, Inc. NFLX, the index has now increased over eight successive sessions. This is its longest stretch of increases since Feb 24, 2015 (when the index had risen over 10 consecutive sessions). But its performance is even more remarkable this time around since it has recovered from a series of recent reverses.

Concerns over overvaluation have plagued the index since June, a month the index closed with losses. Even so, it managed to post the best first half of a year in eight years. This is because investors are continuing to bet on a strong economy and bullish earnings to boost markets. Investing in stocks which make up the Nasdaq continues to make for a profitable proposition at this point in time.

Longest Stretch of Gains since 2015

The primary catalyst for extending this round of gains has been bullish results from Netflix. Shares of the streaming service provider jumped 13.5% after it added over 5.2 million subscribers during the second quarter, much more than the expected 3.2 million. Also, earnings grew 66.7% while revenues increased 32.3% on a year-over-year basis. (Read: Netflix Q2 Earnings Miss, Gains on Subscriber Growth)

Market watchers had backed tech stocks to bounce back, riding on a strong earnings performance. The sector’s recent slide had begun on Jun 9, when a report from Goldman Sachs GS triggered off several questions about gains made recently. It questioned the sky-high valuation of tech stocks, particularly the likes of Facebook FB, Amazon AMZN, Apple AAPL, Microsoft MFST and Alphabet GOOGL.

Overvaluation concerns then triggered off a spate of losses for tech stocks. Ultimately, the Nasdaq closed the month of June 0.9% lower. This was the index’s first monthly loss since the 2.3% decline in Oct 2016.

Solid First Half Performance, Strong Fundamentals

Despite the decline in June, the Nasdaq still managed to finish the second half 14.1% higher. Additionally, the index recorded its best performance for the same period since 2009. At that time, the Nasdaq had skyrocketed by 43.9% to post a far more spectacular performance. Even so, the index notched up 38 all-time highs during the first half of this year.

This is the largest number of record finishes recorded since the same period in 1986. At that time it had ended at record levels on 52 occasions.

Tuesday’s gains come at a time when the fate of President Trump’s new healthcare law looks increasingly uncertain. In the event that it fails to gain passage, fresh questions will arise about the new administration’s ability to deliver on the policy front.

It seems investors are ignoring these developments, choosing instead to focus on low interest rates inflation, a soft dollar and a resilient economy. Strong earnings performances of the likes of Netflix are likely to further bolster markets in the days ahead.

Our Choices

Investors seem to have recovered their confidence in tech stocks, choosing to ignore recent concerns about valuations. A strong earnings show, such as the one from Netflix has bolstered such sentiments, leading to fresh gains for the sector over the past few sessions.

Investing in tech stocks which make up the Nasdaq looks like an extremely prudent option at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

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

Applied Optoelectronics has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 4.8% over the last 30 days. The stock has gained 284.7% year to date.

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

Ultra Clean Holdings has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 1.6% over the last 30 days. The stock has gained 142% year to date. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coherent, Inc. COHR designs, manufactures and supplies electro-optical systems and medical instruments utilizing laser, precision optics and microelectronic technologies.

Coherent has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 0.4% over the last 60 days. The stock has gained 93.2% year to date.

Lumentum Holdings Inc. LITE is a manufacturer of innovative optical and photonic products.

Lumentum Holdings has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 70.1% for the current year. Its earnings estimate for the current year has improved by 18% over the last 30 days. The stock has gained 57.1% year to date.

PayPal Holdings, Inc. PYPL is a technology platform offering online payment solutions.

PayPal Holdings has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 12.1% for the current year. The stock has gained 49.4% year to date.

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Nasdaq Posts Longest Stretch of Gains in 2 Years: 5 Picks