Stocks tumbled to start the final week of the third quarter and continued to fall Thursday in what’s been an up and down period. Wall Street’s attention remains on the Fed and what’s next for the U.S. economy as supply chain setbacks and the delta variant disrupt what was a booming comeback.
Economists and big Wall Street banks have lowered their 2021 GDP forecasts, citing supply chain logjams, rising prices, and the delta variant’s impact on sectors such as travel and leisure. These impacts are real, but the longer-term bullish case remains. For instance, August retail sales were surprisingly solid, highlighting resilience heading into the holidays.
The overall S&P 500 earnings and margin outlook is still strong. Plus, even when the Fed raises rates, we could still be years away from a return to pre-financial crisis levels. It’s worth stressing that the 10-year U.S. Treasury yield has rarely and barely moved above 3% in the last decade and with 2% or higher inflation, Wall Street will likely continue chasing returns in equities (also read: Previewing the Q3 Earnings Season).
The S&P 500 has climbed 16% in 2021 and there could certainly be more selling on the horizon, even though the benchmark index is currently down around 5% from its early September records. That might sound scary, but selling is a part of well-functioning markets (see nearby chart).
Timing the market is difficult and long-term investors are often best served buying strong stocks whenever there’s a pullback, even if there is more selling or volatility ahead. Given this backdrop, here are three blue-chip stocks from totally different industries investors might want to consider buying at discounts in October to anchor their portfolios for years to come…
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Adobe created the PDF and went public in the mid-1980s. These days it’s a cloud software powerhouse, with a portfolio full of the most important creative and design software on the market. The firm’s subscription-based offerings include Photoshop, InDesign, Premiere, and newer software geared to the digital media age.
ADBE’s subscription-based model helps create stable growth and its creative cloud suite is invaluable to countless businesses, schools, and creatives. The company also boosted its business-focused portfolio to include e-signature, documents, marketing, and more. Adobe’s diversified and relatively unique solutions provide a sturdy moat in a crowded and sometimes redundant SaaS space.
Adobe’s FY20 revenue climbed 15% and it topped our Q3 estimates on Sept. 21, with sales and adjusted earnings both up around 22%. Zacks estimates call for its revenue to surge 22.5% this year and jump another 15% higher to $18.2 billion in FY22 and extend its streak of around 15% or stronger top-line growth to eight years running. Meanwhile, its adjusted earnings are expected to climb 23% and 14%, respectively.
ADBE outclimbed Microsoft MSFT and Apple AAPL over the last five years, up 430%. The stock has cooled off in the last year to lag well behind the benchmark and recent profiting-taking around earnings—and the larger downturn—sets up an enticing buying opportunity. Adobe is down 15% from its records and its quick drop pushed it from overbought RSI levels (70 or higher) in early September to oversold (30 or under) at 25.
Adobe lands a Zacks Rank #3 (Hold) right now and Wall Street is extremely high on the stock, with 18 of the 19 brokerage recommendations Zacks has resting at “Strong Buys.” The company also continues to repurchase its stock and its subscription software offerings aren’t going out of style anytime soon.
Along with big tech, diversification and dividends are key aspects to any portfolio. Caterpillar fits the bill and it’s a straightforward way to play economic growth, including continued infrastructure spending. CAT and its iconic yellow machines are synonymous with every corner of construction. The company is also plugged into various re industries through mining equipment and more, as well the energy and transportation sectors.
Along with the huge equipment the average person might see on a daily basis, Caterpillar produces everything from marine diesel engines to gas generators. The Illinois-based firm in recent years has also introduced a services segment to help smooth the sometimes-bumpy road caused by economic boom and bust cycles.
CAT is also rolling out IoT-connected machines that enable customers to know when repairs and spare parts are needed for various equipment that can cost millions of dollars. And Caterpillar’s executive team is prepared to embark on the massive energy transition in the U.S. and elsewhere.
CAT began to break out of a several-year slump after the market hit its coronavirus lows with shares now up 60% in the past two years to easily outpace its industry. Luckily, it has pulled back after it got overheated following a long, post-election run. The stock now trades 20% below its May records and hovers close to oversold RSI levels at 36.
CAT is trading at a 30% discount to its own year-long median at 17.2X forward earnings, which marks value vs. its industry. Caterpillar is also a dividend aristocrat and its 2.30% yield tops the 30-year Treasury’s roughly 2.1% and its industry’s 1% average.
Caterpillar currently lands a Zacks Rank #3 (Hold), alongside “B” grades for Value and Growth in our Style Scores system and it returns value to shareholders through buybacks.
Zacks estimates call for CAT’s adjusted FY21 earnings to skyrocketed 54% on 22% higher revenue. The industrial power is then projected to follow up this strong showing with another 19% earnings growth and 12% strong sales that would see it pull in around $57 billion. The company is set to report its Q3 financial results on Oct. 28.
Walmart posted a banner year in 2020 (FY21), with sales up 7% and comps 9% higher. The retail giant’s e-commerce revenue skyrocketed 80%, driven by beefed-up delivery and pick-up options. WMT also last year launched its subscription service dubbed Walmart+ to compete directly against Amazon AMZN Prime. The service costs $98 a year and offers unlimited free deliveries, discounts on fuel, access to new-age in-store checkout offerings, and more.
On top of that, etail titan has expanded its customer base through diversification, including teaming up with secondhand e-commerce clothing firm ThredUp, partnering with Shopify SHOP to bring more small businesses to its own third-party marketplace, and more.
Walmart’s digital advertising business is also on track to be a multi-billion-dollar-a-year segment. WMT is set to improve its financial services offerings and eventually roll out telehealth services around the country to complement its in-person Walmart Health centers.
Despite coming up against its best performance in years, Zacks estimates call for WMT’s revenue to climb another 1% this year and 2.2% higher next year to reach $578 billion. Plus, its adjusted earnings are projected to jump 16% and 5%, respectively.
Investors should also note that analysts have raised their EPS estimates for the stock recently and it’s crushed our bottom-line estimates in the past two periods. This positivity helps Walmart land a Zacks Rank #2 (Buy) right now, alongside its overall “A” VGM grade.
The firm’s Retail – Supermarkets space is in the top 17% of over 250 Zacks industries and Wall Street analyst are largely high on the stock. And its 1.59% dividend yield tops the recently-rising 10-year U.S. Treasury.
Like its peers on the list, Walmart stock has fallen recently, down over 6% in the past month and nearly 10% from its records. The recent selling sent it into oversold RSI levels at 26. Therefore, now could be a solid entry point for the stock that’s climbed 100% in the past five years to nearly double its industry.
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