The Zacks Analyst Blog Highlights: PowerShares QQQ, iShares Morningstar Large-Cap ETF, Southwest Airlines and Avago Technologies

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Dec 23, 2014, 09:30 ET

CHICAGO, Dec. 23, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the PowerShares QQQ (Nasdaq:QQQ-Free Report), iShares Morningstar Large-Cap ETF (AMEX:JKD-Free Report), Southwest Airlines Co. (NYSE:LUV-Free Report) and Avago Technologies Limited (Nasdaq:AVGO-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday's Analyst Blog:

Santa Claus Rally Coming for ETFS on the "Nice" List

The recent sell-off in U.S. stock market has been triggered of by plunging oil prices, the crashing Russian ruble and rising concerns over the global slowdown. But all these have not being able to deter the S&P 500 from lingering around its all-time high being only 0.4% away from its peak (read: Russia ETFs Crash: What Went Wrong in 2014?).

The S&P 500 saw the strongest two-day gain in three years after the Fed vowed to be patient about interest rates hike. In fact, the index has gained 0.14% so far this month, recouping all losses it incurred in the past two weeks. This justifies the market belief that December is the best performing month for the S&P 500.

However, with only eight trading days left this year, investors wonder whether this bullish trend will sustain for a Santa Claus rally this time around. A Santa Claus rally refers to the increase in stock prices in the month of December, more specifically during the final week of a calendar year (i.e. between Christmas and New Year Day).

According to the Stock Trader's Almanac, the S&P 500 has gained every year since 2009, returning an average of 1.5% over this seven-day period (the last five trading days of the year and the first two sessions of the New Year). Over 50 years, the S&P 500 has a track record of gaining 1.9% on average in the month of December.

Is Santa Claus Rally Really Behind Us?

Good tidings have started to come since in the latter part of last week. The Fed modified its 'considerable time' language to 'patient' about the timing of the first interest rate hike since 2006. This means that the Fed is on track to raise interest rates given a strengthening U.S. economy but is not in a hurry and will keep patience in doing so.

Additionally, oil prices bounced back strongly from their five-year low with crude currently trading above $57 per barrel and Brent above $62 per barrel. Russian ruble recovered from its multi-year lows and Greece signaled that it might dodge yet another political crisis with prime minister Antonis Samaras offering a series of negotiations to resolve the deadlock. Further, low gasoline prices are actually driving consumer spending, which accounts for more than two-thirds of U.S. economic growth (read: Energy ETFs Jump on Lower Stockpiles, Can This Continue?).

Apart from these, the U.S. has been on a stronger growth path defying the sluggish international trends thanks to stepped-up economic activities, improving business conditions, higher-than-expected U.S. GDP growth numbers, renewed optimism in housing recovery, continued job creation and rising consumer confidence. Notably, the economy recorded its two strongest quarters of growth back-to-back in over a decade and is on track for the strongest annual job growth since late 1999.

The U.S. economic resilience suggests that Santa might be on the way to surprise the stock market with Christmas gifts and miracles. The Santa Claus rally will be supported by various other factors such as holiday euphoria, tax-related affairs and people investing their Christmas bonus. While these activities generally compel investors to buy stocks during the last week of the year, the "January effect" will also play a vital role in pulling capital into the market.

Given the bullish sentiments and a renewed hope for a Santa rally, we have highlighted couple of ETFs and stocks that could provide investors handsome returns in the coming weeks.

ETFs to Consider

While there are number of ETFs that are expected to benefit from the Santa Claus rally, we have highlighted the two funds that provide a broad play in various sectors rather than specific ones.

PowerShares QQQ (Nasdaq:QQQ-Free Report)

This product provides exposure to 107 largest domestic and international companies excluding financial stocks by tracking the Nasdaq-100 Index. It is largely concentrated on the top two firms – Apple and Microsoft – with 13.45% and 8.06% of total assets, respectively. Other firms do not hold more than 3.64% share (read: 3 Apple-Focused Tech ETFs to Bet on for the Holiday Season).

From a sector look, information technology dominates the fund's return at 58.1% while consumer discretionary and health care round off the top three. QQQ is the most popular and liquid choice in the large cap growth space with AUM of $45.2 billion and average daily volume of over 36.1 million shares. Expense ratio came in at 0.20%. The ETF has gained about 20% so far this year and has a Zacks ETF Rank of 2 or 'Buy' rating with a Medium risk outlook.

iShares Morningstar Large-Cap ETF (AMEX:JKD-Free Report)

This fund offers exposure to the large cap stocks that have exhibited average growth and value characteristics. It follows the Morningstar Large Core Index, holding 99 securities in its basket. Out of these, MSFT has the largest allocation of 7.06% while other firms account for less than 5.5% share in the basket.

The product is pretty spread across various sectors with consumer staples, health care, financials, industrials and information technology making up for top five holdings. The fund has amassed $679.8 million in its asset base while sees paltry volume of around 19,000 shares. It charges 20 bps in annual fees and is up 17.4% in the year-to-date time frame. The fund has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.

Stocks to Consider

For stocks, we have chosen top picks using the Zacks Screener that fits our five criteria: stock Zacks Rank #1, positive estimate revision for the current quarter, positive estimate revision for the current year, positive earnings surprise over the past four quarters, and year-to-date price performance in excess of the broad market returns. Here are the two recommended stocks (see: all the Large Cap ETFs here).

Southwest Airlines Co. (NYSE:LUV-Free Report)

Based in Dallas, Texas, Southwest Airlines is the nation's largest carrier in terms of originating domestic passengers boarded offering short haul, high frequency, point-to-point and low-fare services. It consistently offers the lowest and simplest fares and has one of the best overall Customer Service records.

The company has seen solid earnings estimate revisions for both the current quarter and the year over the past 30 days. In fact, the consensus estimate for the current quarter has risen from 51 cents to 54 cents per share while the current year estimates climbed from $1.92 to $1.95 per share. It delivered positive earnings surprises in the last four quarters, with an average beat of 12.22%.

The stock currently has the solid Zacks Industry Rank in the top 13% and has surged over 113% in the year-to-date time frame. All these indicate a bright future for Southwest.

Avago Technologies Limited (Nasdaq:AVGO-Free Report)

Based in Singapore, Avago Technologies is a leading designer, developer and global supplier of a broad range of analog semiconductor devices with a focus on III-V based products. Its product includes RF power amplifiers, RF filters, RF front end modules, ambient light sensors, low noise amplifiers, proximity sensors, multimarket-wave mixers, diodes, fiber optic transceivers, serializer/deserializer ASICs, optical laser and receiver components, motion control encoders and subsystems, optocouplers, LEDs, and industrial fiber optics (read: Semiconductor ETFs Riding High on Holiday Optimism).

AVGO has also seen rising earnings estimates for the current quarter and the current year over the past 30 days. The consensus estimates for the current quarter and current year are $1.78 and $6.67 per share, respectively. This is up from $1.50 for the current quarter and $5.83 per share for the current year over the last 30 days. The company has delivered average positive earnings surprises of 15.33% in the last four quarters. This suggests the company's incredible potential to grow in the coming months.

Further, Avago Technologies currently has a solid Industry Zacks Rank (in the top 43%), underscoring the company's solid position.

Bottom Line

Investors should note that the above-mentioned ETFs and stocks have easily crushed the broad market fund and the S&P 500, respectively, by wide margins so far this year. With the positive momentum overall, this bullish trend is likely to continue in the days ahead, especially if the Santa Claus Rally is real.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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