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Top 5 Momentum Picks for May Despite Fed's Aggressive Stance

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In its May FOMC meeting, the Fed initiated aggressive strategies to combat soaring inflation, which is currently at a 40-year high. The central bank hiked the benchmark interest rate at a magnitude not seen since 2000 and announced the date of commencement and size of its balance sheet shrinkage. However, Wall Street applauded the Fed’s decisions with an astonishing rally on May 4.

Fed’s aggressive stances were much anticipated by market participants. In addition, Fed Chairman Jerome Powell cleared doubts of investors about how the rate hikes will likely to take shape in the rest of 2022. Market participants are relieved that the Fed will not take any ultra-hawkish policies to contain inflation, which may lead to economic recession.

We expect U.S. stock markets to stabilize in May after an extremely volatile April. At this stage, it should be fruitful to buy momentum stocks with a favorable Zacks Rank. Five of them are — Archer-Daniels-Midland Co. (ADM - Free Report) , C.H. Robinson Worldwide Inc. (CHRW - Free Report) , Antero Resources Corp. (AR - Free Report) , Packaging Corporation of America (PKG - Free Report) and Carlisle Companies Inc. (CSL - Free Report) .

Wall Street Appreciates Fed’s Decisions

In his post-FOMC statement, Jerome Powell said that the central bank has decided to raise the benchmark interest rate by 50 basis points effective immediately. Notably, the Fed raised the lending rate by 25 basis points in its March FOMC, for the first time in more than three years. With this decision, the Fed fund rate has increased to 0.75-1%.

Moreover, the Fed has decided to shrink the size of its $9 trillion balance sheet in a phased manner affective Jun 1. Initially, the central bank will roll off $30 billion of Treasury Notes and $17.5 billion on mortgage-backed securities per month. After three months, the size of the Treasury Note will increase to $60 billion and mortgage-backed securities will increase to $35 billion per month.

The decision of hiking the benchmark interest rate by 50 basis points in a FOMC is the highest since 2000. Market participants were expecting a 50 basis point rate hike and an official announcement of the beginning of the balance sheet reduction program in May FOMC.

A section of economists and financial experts remained concerned that the Fed may become highly aggressive with a 75 basis-point rate hike in May. However, Powell categorically said that the central bank is not seriously considering a 75 basis point rate hike.

At the same time, he hinted that a rate hike of 50 basis points is likely to come in the next two FOMC meetings. At present, the CME FedWatch data indicates that the Fed fund rate will reach 2.75-3% by the end of 2022.

Wall Street had a relief rally after the Fed Chair provided a clear guidance about the Fed fund rate structure for the rest of 2022. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — climbed 2.8%, 3% and 3.2%, respectively. The small-cap benchmark Russell 2000 also surged 2.7%. Market’s fear gauge – CBOE VIX — fell 13.1% to 25.42.

Our Top Picks

We have narrowed our search to five large-cap (market capital > $10 billion) momentum stocks. These stocks have seen strong earnings estimate revisions within the last 7 days indicating that the market is expecting this companies to do good  business in the near-term.

Moreover, these stocks have provided double-digit returns in the past three months and have more upside left. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Momentum 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 three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Archer-Daniels-Midland has been gaining from solid demand, improved productivity and product innovations. Persistent growth in the Nutrition segment of ADM, driven by significant gains in the Human and Animal Nutrition units, remained the key growth drivers. Archer-Daniels-Midland expects the nutrition segment’s operating profit growth of 20% in 2022. The company has been significantly progressing on its three strategic pillars — optimize, drive, and growth.

Archer-Daniels-Midland has an expected earnings growth rate of 15.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 7% over the last 7 days. The stock price has surged 20% in the past three months.

C.H. Robinson is benefiting from favorable freight market conditions, such as increased volumes and higher pricing, amid tight capacity. CHRW’s growth-by-acquisition policy is also impressive.

To this end, in May 2021, C.H. Robinson acquired freight forwarding company Combinex Holding B.V. to strengthen its European Surface Transportation business. The acquisition not only broadens its customer base but also improves customer services by clubbing Combinex’s expertise.

C.H. Robinson has an expected earnings growth rate of 14.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 12.3% over the last 7 days. The stock price has climbed 23.8% in the past three months.

Packaging Corporation manufactures and sells containerboard and corrugated packaging products in the United States. PKG continues to benefit from robust packaging demand backed by e-commerce and rising requirement for the packaging of food, beverages and medicines.

PKG’s Packaging segment will benefit from higher corrugated products shipments with three additional shipping days. For the Paper segment, the company expects higher prices and mix. Packaging Corporation continues to implement price hikes that will help offset the impact of high operating costs, freight expenses and supply chain issues on margins.

Packaging Corporation has an expected earnings growth rate of 24.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2% over the last 7 days. The stock price has advanced 11.6% in the past three months.

Antero Resources has positioned itself among the fast-growing natural gas producers in the United States. AR’s strategic acreage position in the low-risk and long reserve-life properties of the Appalachian Basin is a major positive. Its core acreage position allows for major long lateral drilling opportunities and capital efficiencies.

Antero Resources expects to generate $1.5-$1.7 billion of free cash flow in 2022, suggesting a significant improvement from $849 million reported in 2021. AR is targeting a capital return program of 25%-50% of free cash flows annually, beginning with the implementation of the share repurchase program of up to $1 billion. Also, Antero Resources is well-positioned to capitalize on the rising natural gas price.

Antero Resources has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.6% over the last 7 days. The stock price has soared 89.3% in the past three months.

Carlisle is set to gain from strength in the U.S. reroofing end markets along with acquired assets. Strength in the medical technologies business and recovery in the commercial aerospace business are likely to drive CSL’s performance.

Carlisle’s focus on product launches and an improved outlook for industrial capital spending should be beneficial. For 2022, Carlisle expects revenues to grow more than 30% year over year. CSL’s shareholder-friendly policies are likely to act as tailwinds.

Carlisle has an expected earnings growth rate of 68.9% for the current year. The Zacks Consensus Estimate for current-year earnings improved 11% over the last 7 days. The stock price has jumped 25.3% in the past three months.

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