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Have Inflation and Interest Rates Peaked? If So, Buy These Stocks

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A lot has happened over the last few days. Early last week, investors were coming to terms with the fact that the Fed may reaccelerate interest rate hikes back to 50 bps per meeting. But following the Silicon Valley Bank debacle, and other potential risks in the regional banking sector, traders have flipped and are now expecting no raise at all. It has been a massive swing in expectations. The rates market is as volatile as it has been since Covid as indicated by the MOVE index.

Yesterday and today, the market received inflation data in the form of CPI and PPI. CPI and PPI both reported in line with analyst expectations but the Core CPI and Core PPI, which exclude the most volatile components both came in above expectation.

Because of the new developments in markets though it seems inflation may now be taking a back seat to stabilizing the banking sector. Even after the inflation reports, traders are still expecting a pause in rate hikes. Nobody had expected hikes to be completely off the table just a few days ago. The FOMC meeting does not end until Wednesday, March 22 so there is time for participants to change their mind, but those are the expectation now.

CME Group
Image Source: CME Group

With interest rates potentially peaking, growth stocks, whose valuations got killed last year may be where to rotate next.

Sea Limited

Sea Limited (SE - Free Report)  is a Singapore based tech conglomerate. SE has e-commerce, online gaming, and a digital payments businesses focused on the Southeast Asian region.

During the post pandemic boom Sea Limited became one of Wall Street’s favorite stocks. Between March 2020 and October 2021 SE stock went up nearly 10x, as its high margin, diversified businesses, in the rapidly growing Southeast Asian market tantalized investors.

SE was one of these growth stocks that ran at an earnings loss, and in hindsight was trading at absurdly high valuations. Reality hit investors like a ton of bricks, and from high to low the stock corrected a brutal -90%.

But tides have turned, and SE recently reported positive earnings and continued strong growth. SE also currently boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions.

Sales in the current quarter are expected to grow 12.6% to $2.9 billion, while earnings are expected to climb 191% to $0.73 per share over that same period. Current year earnings are projected to grow a massive 330% to $2.29 per share.

Zacks Investment Research
Image Source: Zacks Investment Research

After one point trading as high as 32x sales in 2020 its valuation has dropped to much more reasonable levels. Today it trades at 34x one-year forward earnings, which is a good valuation for a rapidly growing, high margin business.

Zacks Investment Research
Image Source: Zacks Investment Research


Salesforce (CRM - Free Report)  is the market leading enterprise customer relationship management software company. CRM recently initiated a compelling turnaround. After showing a nearly flat three-year performance, and being targeted by activist investors, CRM is off to a very strong start this year.

Activist investors compelled CRM management to restructure the business to prioritize profits, and it has been working in Salesforce’s favor.

Zacks Investment Research
Image Source: Zacks Investment Research

Salesforce earns a Zacks Rank #1 (Strong Buy) stock right now, indicating upward trending earnings revisions. Last quarter it surprised earnings to the upside by 24%, and next quarter is expected to beat by 2%.

Current quarter sales are expected to grow 10.3% to $8.2 billion, and earnings are expected to expand by 62% to $1.59 per share. Current year sales are projected to climb 10.5% to $34.6 billion and current year earnings are set to grow 33% YoY to $6.96 per share. It seems management’s strategy is working to bump those profits.

Analysts are in unanimous agreement in upgrading CRM’s earnings expectations across all time frames.

Zacks Investment Research
Image Source: Zacks Investment Research

Salesforce is currently trading at a one-year forward earnings multiple of 37x, which is well below its three-year median of 116x, and just off its 10-year low of 35x.

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

What happens next in markets with regards to interest rates is of course unknown. But many growth stocks that fell dramatically out of favor last year have made convincing turnarounds. SE has done a complete 180 and is now massively profitable, while CRM has prioritized earnings growth which much success.

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