Wall Street has been suffering since the beginning of 2022 after finishing two successive impressive years despite being pandemic-ridden. In fact, severe volatility has gripped U.S. stock markets since Black Friday of 2021 with the resurgence of the Omicron variant of coronavirus and Fed’s decision of a drastic shift from ultra-dovish monetary policies to a relatively hawkish stance.
Consequently, market participants are uncertain about the direction of stock market movement in the near-term. At this stage, it will be prudent to invest in low-beta, high-dividend-paying stocks with a favorable Zacks Rank. Five such stocks are —
Pfizer Inc. ( PFE Quick Quote PFE - Free Report) , Baxter International Inc. ( BAX Quick Quote BAX - Free Report) , Interactive Brokers Group Inc. ( IBKR Quick Quote IBKR - Free Report) , Public Storage ( PSA Quick Quote PSA - Free Report) and CubeSmart ( CUBE Quick Quote CUBE - Free Report) . Higher Interest Rate Looms Large
On Dec 15, Fed Chairman Jerome Powell said in his post FOMC statement that the central bank will raise the tapering of the monthly bond-buy program from $15 billion per month to $30 billion per month effective January 2022. At this rate, the quantitative easing program will end in March 2022.
Although, Powell refrained from commenting anything on when the Fed will raise the benchmark lending rate and at what magnitude, Fed’s dot-plot indicates that all 18 members are expecting at least one rate hike in 2022. Out of 18 Fed members, 12 are expecting three rate hikes in 2022 followed by two more rate hikes in 2023 and 2024. Several analysts also warned that the Fed might hike rates as early as March.
The primary concern of the central bank is soaring inflation. The pandemic-led global disruption of the supply-chain system inflated input costs while growing demand is pulling up the general price level. In the United States, the consumer price index jumped to a 40-year high in December.
Weak Economic Data
We are not out of the woods of the pandemic. Recently released various economic data for December has clearly indicated that. The U.S. economy added just 199,000 nonfarm payrolls in December, well below the consensus estimate of 412,000 and November’s data of 249,000.
The Institute of Supply Management reported that the U.S. manufacturing index for the month of December slid to a 11-month low at 58.7. The consensus estimate was 60.3. The reading for November was 61.1.
The Department of Commerce reported that retail sales in December tumbled 1.9% compared with the consensus estimate of a decline of 0.2%. November’s data was revised downward from an increase of 0.3% to 0.2%. The biggest drop happened in online retail sales that fell 8.7%.
The Federal Reserve reported that industrial production dipped 0.1% in December compared with the consensus estimate of an increase of 0.2%. November’s data was revised upward from a gain of 0.5% to 0.7%. Capacity utilization came in at 76.5% in December compared with the consensus estimate of 77%.
The University of Michigan reported that the preliminary data of January for consumer sentiment came in at 68.8, marking its second-lowest reading in the past decade. The consensus estimate was 69.6. The final reading of December was 70.6.
Why Low-Beta Stocks?
Year to date, the three major stocks indexes — the Dow, the S&P 500 and the Nasdaq Composite — slid 1.2%, 2.2% and 4.8%, respectively. The Dow and the S&P 500 reported losses in the last two weeks while the Nasdaq Composite posted losses in the last three weeks.
Nevertheless, the fundamentals of the U.S. economy remained solid. In its latest projection on Jan 14, the Atlanta Fed reported that the U.S. economy would grow by 5% in fourth-quarter 2021. U.S. GDP grew 6.4%, 6.7% and 2.1%, in the first, second and third quarters of last year, respectively. Moreover, total earnings of the S&P 500 Index are expected to up 20.9% year over year in the fourth quarter on 11.7% higher revenues.
At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option. If the market’s northbound journey continues, then the favorable Zacks Rank of these stocks will capture the upside potential. However, if markets take a downturn, then low-beta stocks will minimize portfolio losses and dividend payment will act as a regular income stream.
Our Top Picks
We have narrowed our search to five large-cap (market capital > $10 billion) low-beta stocks with a solid dividend yield. These companies have strong growth potential for 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #1 (Strong Buy). 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 in the past year.
Image Source: Zacks Investment Research Pfizer expects strong growth of key brands like Ibrance, Inlyta and Eliquis to drive sales. PFE’s COVID-19 vaccine has become a key contributor to its top line. The approval of Paxlovid, Pfizer’s oral antiviral pill for COVID, will bring in additional revenues in 2022. PFE boasts a sustainable pipeline with multiple late-stage programs that can drive growth.
The Consumer Healthcare joint venture with Glaxo and the merger of the Upjohn unit with Mylan has made Pfizer a smaller company with a diversified portfolio of innovative drugs and vaccines. The smaller Pfizer should see better revenue growth.
PFE has an expected earnings growth rate of 38.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.8% over the last 7 days. Pfizer has a current dividend yield of 2.84%.
Baxter International saw strong performance across all its business units in third-quarter 2021. Solid geographical performances are also encouraging. Regulatory approvals, product launches and buyouts are the primary highlights for BAX.
Expansion in both margins fuels further optimism. Potential in acute therapies, surgical portfolio and renal-care space are promising for Baxter International. A robust product portfolio is also impressive. A strong solvency position is an added plus for BAX.
Baxter International has an expected earnings growth rate of 16.9% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.7% over the last 7 days. BAX has a current dividend yield of 1.31%.
Interactive Brokers Group operates as an automated electronic broker worldwide. IBKR specializes in executing and clearing trades in securities, futures, foreign exchange instruments, bonds, and mutual funds. Interactive Brokers Group’s efforts to develop proprietary software (including IBKR Lite), its low level of compensation expenses relative to net revenues and an increase in emerging market customers will likely continue aiding its financials. The acquisition of the retail unit of Folio Investments will strengthen IBKR’s position in the online brokerage space.
Interactive Brokers Group has an expected earnings growth rate of 5.5% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.4% over the last 30 days. IBKR has a current dividend yield of 0.54%.
Public Storage is a leading self-storage real estate investment trust in the United States. Public Storage is the most recognized and established name in the self-storage industry, with its presence across all major metropolitan markets of the United States.
PSA continues to benefit from its growth efforts through acquisitions, developments and expansions. Favorable self-storage industry fundamentals also augur well for the company. Though a development boom in many markets might lead to stiff competition, Public Storage is poised to ride the growth curve with high occupancy, leading to a greater pricing power, a healthy balance-sheet position, high brand value and technological advantage.
PSA has an expected earnings growth rate of 12.9% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.1% over the last 60 days. Public Storage has a current dividend yield of 2.21%.
CubeSmart is a self-administered and self-managed real estate company focused on the ownership, operation, acquisition and development of self-storage facilities in the United States. CUBE’s self-storage facilities are designed to offer storage space for residential and commercial customers.
CubeSmart has an expected earnings growth rate of 14.7% for the current year. The Zacks Consensus Estimate for current-year earnings improved 7.1% over the last 60 days. CUBE has a current dividend yield of 3.37%.