The U.S. economy expanded at a faster pace in the first quarter than earlier estimated, according to data released on Tuesday. As the country entered its eighth year of economic expansion, other indicators such as housing and retail sales also remained promising. However, underlying fears exist about whether growth is robust enough to withstand the fallout of a recent Brexit.

The most significant upward revisions which stand out are the extent of spending on software, research and development. In the backdrop of falling expenditure on equipment and weak gains made by several services it may be a good idea to bet on stocks from these categories.

Final Q1 Estimate Revised Upward

The “third” estimate from the Bureau of Economic Analysis showed that first quarter output of goods and services increased at an annual rate of 1.1%, higher than the consensus estimate of a 1% increase. Further, first-quarter GDP data was revised upward from the previously estimated 0.8% rise.

However, first quarter GDP growth was much lower than the rate of 1.4% recorded in the fourth quarter of 2015. Business spending declined for the second consecutive quarter. Also, consumer expenditure growth was revised downward from 1.9% to 1.5%. This was primarily due to low spending levels on services, primarily recreation and transportation.

Ultimately, there were two major reasons for the upward revision in the estimate for first quarter GDP. Firstly, exports increased by 0.3%, contrary to the earlier estimate of a decline of 2%. More importantly, business expenditure on software, research and development increased by 4.4% versus the earlier estimate of a 0.1% decline.  

Are Brexit Fears for Real?

The shock result of the recent British referendum has led several economists and market watchers to believe that the fallout could weigh on GDP growth over the upcoming six quarters. Most of this is likely to be due to lower business expenditure. Rising uncertainty could result in several companies pushing back or reducing the scale of new projects.

However, the Fed is unlikely to raise rates as a result of such worries. A weak interest rate regime should outweigh the impact of such global turmoil. Additionally, the U.S. economy usually picks up pace over the second quarter, rebounding during spring and summer. Car sales remain strong and existing home sales hit a nine-year peak in May.

Our Choices

Despite some factors weighing on GDP during the first quarter, final estimates have experienced an upward revision. The likelihood of a pickup in growth during the second quarter remains strong.

Expenditure on software, research and development has contributed significantly to the increase in the first quarter GDP. Adding these stocks to your portfolio would be a good option at this point. At the same time, it is important to pick winning stocks.  

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. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Bruker Corporation (BRKR - Analyst Report) designs and manufactures proprietary life science and materials research systems and associated products. 

Bruker Corp has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 13.8% for the current year.

Charles River Laboratories International, Inc. (CRL - Snapshot Report) is a leading provider of critical research tools and integrated support services that enable innovative and efficient drug discovery and development.

Charles River Laboratories has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 16.8% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days.

Laboratory Corp. of America Holdings (LH - Analyst Report) is a leading healthcare diagnostics company, providing comprehensive clinical laboratory services and end-to-end drug development support.

Laboratory Corp. of America has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 11.1% for the current year.

Synchronoss Technologies, Inc. (SNCR - Snapshot Report) is a provider of cloud-based solutions and software activation for a variety of customers across the world.

Synchronoss has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 12% for the current year.

Varonis Systems, Inc. (VRNS - Snapshot Report) is the provider of an innovative software platform that allows enterprises to map, analyze, manage and migrate unstructured data.

Varonis Systems has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 4.4% for the current year.