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Top 5 Value Picks to Shrug Off Market Gyrations

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Wall Street is reeling under extreme volatility in January. Market participants are highly concerned about soaring inflation. Moreover, the Fed's uncertainty regarding the pace and magnitude of an interest rate hike to contain inflation has injected severe fluctuations in day-to-day trading since mid-January.

The Fed has clearly indicated that it will raise interest rate in March, for the first time in three years. Consequently, investors are rebalancing their portfolios from momentum/growth stocks to those stocks that have potential value. At this stage, it will be prudent to invest in value stocks with a favorable Zacks Rank. Five of them are Ford Motor Co. (F - Free Report) , Hewlett Packard Enterprise Co. (HPE - Free Report) , Westlake Chemical Corp. (WLK - Free Report) , Lumen Technologies Inc. (LUMN - Free Report) and DICK'S Sporting Goods Inc. (DKS - Free Report) .  

A More Hawkish Fed

On Jan 26, after the conclusion of the first Fed FOMC meeting of this year, Chairman Jerome Powell signaled the first rate hike in three years in as early as in March. The central bank’s quantitative easing program will also come to an end in March.

Although the Fed refrained from stating the month and magnitude of the interest rate hike, Powell said, “Inflation risks are still to the upside in the views of most FOMC participants, and certainly in my view as well. There’s a risk that the high inflation we are seeing will be prolonged. There’s a risk that it will move even higher.”

The Fed Chairman further added, “In light of the remarkable progress we’ve seen in the labor market and inflation that is well-above our 2% long-run goal, the economy no longer needs sustained high levels of monetary policy support.”

In a separate press statement, the FOMC has also indicated that the Fed is thinking of shrinking its $9 trillion balance sheet later this year. Powell said, “There’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable.”

Wall Street plummeted in January owing to huge uncertainty regarding the movement of liquidity and market interest rate going forward. Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — tumbled 6%, 8.7% and 13.4%, respectively.

The Nasdaq Composite is in deep correction territory plunging 16.5% from its all-time high. The S&P 500 is approaching the correction zone with a drop of 9.7% from its all-time high. The Dow has slipped 7.5% from its all-time high.

Robust U.S. Economy to Drive Stock Markets

In 2022, the biggest drivers of the U.S. stock markets should be the nation’s strong economic fundamentals. We expect the U.S. economy to become fully operational as the pandemic is expected to reach its peak this winter. Several major investment bankers and money managers have already started removing pandemic-related adjustments from their financial models.

The U.S. economy will get more upside from the government’s infrastructure spending. On Nov 15, President Joe Biden signed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years.

The infrastructure development project will be a key catalyst for the U.S. stock markets in 2022. Various segments of the economy such as basic materials, industrials, utilities and telecommunications should benefit immensely with more job creation.

Moreover, the White House has put pressure on Congress to quickly pass legislation providing $52 billion to help computer chip manufacturers and ease the shortage of the components vital to many industries.

Another near-term driver of U.S. stocks will be the fourth-quarter 2021 earnings results. As of Jan 26, total earnings of the S&P 500 Index are expected to be up 22.1% from the same period last year on 12.2% higher revenues.

Our Top Picks

At this stage, investors should be prepared to minimize fluctuations in their portfolio and consequently rebalance it with suitable financial assets to maintain stability. We have narrowed our search to five value stocks. Each of our picks carries a Zacks Rank #1 (Strong Buy) and a Value Score of 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 in the past year.

Zacks Investment ResearchImage Source: Zacks Investment Research

Ford Motor raised its full-year 2021 guidance and dividend restoration. A strong vehicle mix supported by F-series trucks and SUV models is expected to bolster the company’s revenues. A collaboration with Google to bolster the development and delivery of connected vehicles also bodes well.

Ford Motor’s aggressive electrification push, with planned spending of around $30 billion by 2025 and the target of 40% of its global vehicle volume to become all-electric by the end of the decade, augur well. While Mustang Mach-E of F has already become a hit among consumers, the upcoming launches like F-150 Electric, Maverick hybrid pickup and E-Transit are set to drive its top line further.

The forward price-to-earnings ratio (P/E) for the current financial year is 10.9X, lower than the S&P 500 average of 18.8X. F has a PEG ratio of 0.4, lower than the S&P 500 average of 1,9. Ford Motor has expected earnings growth of 8.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.1% over the last 7 days.  

Hewlett Packard Enterprise has benefitted from strong executions in clearing backlogs, improved supply-chain and increased customer acceptance. HPE’s efforts to shift focus to higher-margin products like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding its bottom line.

Additionally, Hewlett Packard Enterprise’s  target of saving at least $800 million annually by fiscal 2022-end through its cost optimization plan is a positive. Moreover, HPE’s multi-billion-dollar investment plan for expanding networking capabilities will help it to diversify business from server and hardware storage markets, and boost margins over the long run.

The forward P/E for the current financial year is 7.9X, lower than the S&P 500 average of 18.8X. HPE has a PEG ratio of 1.4, lower than the S&P 500 average of 1,9. Hewlett Packard Enterprise has expected earnings growth of 3.6% for the current year (ending October 2022). The Zacks Consensus Estimate for current-year earnings has improved 1.4% over the last 60 days.  

DICK'S Sporting Goods has been gaining from continued focus on developing every possible avenue to generate greater sales. As part of its long-term plan, DKS plans to make significant investments in e-commerce, technology, store payroll, Team Sports and private brands. DICK'S Sporting Goods remains on track to build the best omni-channel experience for athletes by strengthening store network and expanding e-commerce presence.

The forward P/E for the current financial year is 7.6X, lower than the S&P 500 average of 18.8X. DKS has a PEG ratio of 0.6, lower than the S&P 500 average of 1,9. Although DICK'S Sporting Goods has negative expected earnings growth for the current year, the Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 30 days.  

Westlake Chemical is benefiting from synergies from the Axiall acquisition. The buyout has diversified its product portfolio and geographical operations. The NAKAN acquisition has also allowed Westlake Chemical to boost its compounding business globally. Further, Westlake Chemical sees favorable demand trends for polyethylene and polyvinyl chloride resin.

Strong demand in the polyethylene business is likely to continue, especially in food packaging. Also, rising housing starts in the United States augur well for WLK’s downstream vinyl products business and domestic demand for PVC. Westlake Chemical should also benefit from its capacity expansion projects.

The forward P/E for the current financial year is 6.4X, lower than the S&P 500 average of 18.8X. WLK has a PEG ratio of 0.2, lower than the S&P 500 average of 1,9. Although Westlake Chemical has negative expected earnings growth for the current year, the Zacks Consensus Estimate for current-year earnings has improved 8.6% over the last 30 days.  

Lumen Technologies continues to expand its network infrastructure in several cities, as it helps businesses meet the growing demand for high-speed connectivity. LUMN aims to transform its business operations through product evolution and digitizing of customer interactions, which augurs well for growth.

Lumen Technologies has been selected by the U.S. Army Reserve Command to provide Virtual Private Network services to more than 650 Army Reserve locations across the country. LUMN’s fiber and IP-based network capacity position it well to support customers and enhance shareholders' value in the long term.

The forward P/E for the current financial year is 8X, lower than the S&P 500 average of 18.8X. LUMN has a PEG ratio of 1.0, lower than the S&P 500 average of 1,9. Ford Motor has expected earnings growth of 8.1% for the current year. Although Lumen Technologies has negative expected earnings growth for the current year, the Zacks Consensus Estimate for current-year earnings has improved 5.6% over the last 60 days.