2 Best Stocks to Own in the First Quarter

IYT has been among the best ETFs in the first three months of the year, historically

by Andrea Kramer

Published on Dec 27, 2017 at 2:03 PM

U.S. stocks are about to wrap up their best quarter in four years, and the Dow is set for its longest quarterly win streak in 20 years. Looking ahead to the first quarter of 2018, which kicks off on Tuesday, a pair of airline stocks could rally, if history is any guide. In fact, Alaska Air Group, Inc. (NYSE:ALK) stock has handily outperformed in the first three months of the year, and has been the best S&P 500 Index (SPX) stock to own during this time frame. Further, Delta Air Lines, Inc. (NYSE:DAL) stock also tends to do well to start the calendar year, making the list of the 25 best stocks to buy before 2018.

Below are the best SPX stocks in the first quarter, looking back 10 years. Alaska Air Group is one of only two equities that have been higher a whopping 100% of the time, and the stock has averaged a huge gain of 23.8% in the first quarter, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. That's easily the best overall. Meanwhile, Delta Air Lines stock has ended the quarter higher 90% of the time, and its average return of 18.47% is second on the list.

best stocks first quarter

Alaska Air Group Has Been the Best Stock for the First Quarter

On the charts, 2017 has been a struggle for ALK shares, which are set to end the year down 16.4%. The security has been in a channel of lower highs and lows since peaking north of $101 in early March, and a first-quarter win would snap a three-quarter losing streak for ALK -- its longest since 2007, just before the financial crisis.

Still, the security has rebounded more than 21% since touching an annual low of $61.10 in mid-November, but has yet to erase the late-October losses triggered by an earnings miss. Another 23.8% rally from the stock's current perch at $74.13 would put Alaska Air Group shares around $91.77 -- just below its July highs.

ALK stock chart

However, despite the airline stock's struggles this year, there's not much evidence of sideline cash to drive big gains. Short interest fell more than 25% in the past two reporting periods, and now just over 4% of ALK's stock is dedicated to short interest. Meanwhile, nine of 12 analysts already offer "buy" or "strong buy" endorsements, suggesting a round of future upgrades may not be in the cards.

Recent options buyers have also been much more bullish than usual. The equity's 10-day call/put volume ratio of 4.14 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is higher than 79% of all other readings from the past year.

Delta Stock Tends to Outperform in First Week, Quarter of the Year

On the flip side, Delta Air Lines stock is set to wrap up 2017 with a 13.8% gain, and has rallied roughly 24% since testing support at its 320-day moving average back in August. Further, the stock notched a record high of $56.84 just last week, with help from tax reform optimism, and is pacing for a fourth straight monthly win, up 5.8% in December. DAL stock has enjoyed just two other four-month win streaks since 2014.

At last check, the shares were trading at $55.98; another 18.47% rally in the first quarter would launch the security deep into uncharted territory, to $66.32. In the shorter term, Delta Air Lines stock could tack on another 2.92% next week, should history repeat, as DAL is also among the best stocks to own the week of New Year's Day, historically. A similar rally of that magnitude would be enough to lift the shares to new all-time highs.

DAL stock chart

As with ALK, though, there's little in the way of skepticism that could unwind for Delta stock. Short interest represents just over a day's worth of pent-up buying demand, at the security's average pace of trading, and not one of the 15 analysts following DAL consider it anything other than a "buy" or "strong buy." Likewise, options buyers on the ISE, CBOE, and PHLX have scooped up calls over puts by a margin of more than 2.5-to-1 during the past two weeks.

ETF Returns in the First Quarter

In conclusion, Alaska Air Group and Delta Air Lines stocks tend to outperform in the first quarter. From a contrarian perspective, though, the lack of notable pessimism surrounding the airline issues could mean most of Wall Street has already bought in. Nevertheless, ALK and DAL stocks are two to watch as 2018 kicks off.

But for those uninterested in rolling the dice on that pair of stocks, consider other opportunities in the airlines and transport sectors. After all, the iShares Transportation Average ETF (IYT) -- of which both ALK and DAL are holdings -- has been among the best exchange-traded funds (ETF) in the first quarter, historically. Over the past 10 years, the fund has ended the quarter higher 70% of the time, averaging a healthy gain of 5.02% -- the best of all ETFs we track.

ETFs in 1st quarter


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