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Fed Likely to Maintain Dovish Policies: 5 Top Growth Picks

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Fed Chairman Jerome Powell, in his annual Jackson Hole symposium lecture, signaled the tapering of the central bank’s $120 billion per month bond-buying program provided the economic recovery remains better than expected.

Several economists and financial experts have started believing that the Fed will announce its tapering decision as early as in the September FOMC meeting. the Fed Chair has, however, refrained from giving any clue as to when the tapering will start or the initial amount by which the quantitative easing program will be reduced.

However, a highly disappointing nonfarm payroll data for August has changed the entire landscape. The U.S. economy added a mere 235,000 jobs last month compared with an upwardly revised 1.053 million in the previous month. The consensus estimate was for 726,000 job additions.

Fed Unlikely to Start Tapering in September

The primary reason for this disappointing data was the rapid spread of the highly-infectious Delta variant of coronavirus. According to the New York Times tracker, the United States is witnessing more than 1,000 COVID-19 deaths per day on average for the first time since March. For the week ended Sep 3, the average new cases were up 24% from two weeks ago.

Consequently, the Fed is unlikely to change its ongoing ultra-dovish monetary policies anytime soon as Powell clearly said that the economy has to improve a lot, especially related to the labor market, to achieve the Fed’s target of substantial progress.

The important point is that the Fed has taken an extremely cautious approach to tapering its bond-buy program. The central bank will think about readjusting accommodative stances only after the economy achieves that target.

After September, the Fed’s next FOMC meeting will be held in November. Even if the central bank takes any sort of tapering decision in that meeting, the actual implementation is unlikely to take place before early 2022. As a result, a hike in the benchmark interest rate, which is currently as low as 0-0.25%, will possibly not materialized before late 2023.

Inflation Seems Transitory

A few recently released economic data have shown early indications that U.S. inflation may have picked up though it is likely to remain elevated for the rest of 2021. Jerome Powell has also repeatedly said that the current inflation is transitory, but, it may stay for a longer period than previously expected.

The weekly unemployment benefit provided by the U.S. government as part of its fiscal stimulus for coronavirus relief ended on Sep 6. This will force more manpower to return to work and consequently the wage rate will decline. The average hourly wage rate surged 0.6% in August from 0.4% in July.

Moreover, a lack of weekly unemployment benefit may reduce personal consumption expenditure (“PCE”). In fact, owing to the spread of the Delta variant of COVID-19 infection, consumer spending rose a mere 0.3% in July compared with a rise of 1.1% in June. Therefore, the resurgence of coronavirus and the lack of fiscal stimulus are expected to reduce demand-pull inflation.

The Institute of Supply Management revealed in its U.S. manufacturing PMI report for August that the Prices Paid Index (input costs to manufacturers) dropped to 79.4% in August from 85.7% in July and 92.1% in June. This marked the first reading of below 80% since December 2020. The gradual decline of this key index has clearly indicated that the cost-push inflation in the U.S. economy is possibly dwindling.

Moreover, the core (excluding volatile items like food and energy) PCE inflation —- Fed's favorite inflation gauge — increased 0.3% in July compared with an increase of 0.5% in June. Year over year, the core PCE inflation climbed 3.6% in July, marking the same rise as in June. However, it marks the highest monthly growth in inflation since May 1991.

Our Top Picks

We have narrowed down our search to five growth stocks that have solid upside left for the rest of 2021. These stocks have also witnessed positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Growth Score A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

The TJX Companies Inc. (TJX - Free Report) is benefiting in every major category as well as region for HomeGoods and Home Sense. It is also benefiting from its robust store and e-commerce growth efforts. The company remains committed to boosting growth, through effective marketing initiatives and loyalty programs.

The company has an expected earnings growth rate of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for earnings for current-year earnings improved 12.6% over the last 30 days.

Gartner Inc. (IT - Free Report) operates as a research and advisory company in the United States, Canada, Europe, the Middle East, Africa, and internationally. It operates through three segments: Research, Conferences, and Consulting.

Gartner offers timely, thought-provoking and comprehensive analysis that is known for its high quality, independence and objectivity. Its research reports have become indispensable tools for various companies across different sectors, strengthening its leading position in the market. It has a large and diverse addressable market with low customer concentration that mitigates operating risks.

The company has an expected earnings growth rate of 60.1% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 21.4% over the last 60 days.

LKQ Corp. (LKQ - Free Report) distributes replacement parts, components, and systems used in the repair and maintenance of vehicles. It operates through three segments: North America, Europe, and Specialty.

The company is benefitting from strategic buyouts like Elite Electronics buyout and acquisition of Green Bean Battery and Greenlight Automotive. It is witnessing ongoing recovery in demand in its North American and European segments, along with robust strength in its Specialty segment and the trend is likely to continue.

The company has an expected earnings growth rate of 42% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 1.4% over the last 7 days.

Jones Lang LaSalle Inc. (JLL - Free Report) provides commercial real estate and investment management services worldwide. The company continues to benefit from the sustained resilience of Property & Facility Management, highlighting the strength of its global platform. Technology investments and cost-mitigation efforts also augur well for its long-term profitability.

The company has an expected earnings growth rate of 62.5% for the current year. The Zacks Consensus Estimate for the current year improved 7.7% over the last 30 days.

Lithia Motors Inc. (LAD - Free Report) operates as an automotive retailer in the United States. The company operates through three segments: Domestic, Import and Luxury. Lithia’s diversified product mix and multiple streams of income reduce its risk profile.

Enhanced digital solutions — including Driveway e-commerce program — are helping Lithia to further boost profitability and market presence. Lithia’s acquisition of dealerships helps to increase its market share and positions it for growth.

The company has an expected earnings growth rate of 62.5% for the current year. The Zacks Consensus Estimate for the current year improved 6.5% over the last 30 days.