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Wall Street Melts on Panic Selling: Buy 5 Bigwigs On the Dip

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Wall Street witnessed a sharp fall on May 18 as some retail giant delivered disappointing earnings results due to skyrocketing inflation. Moreover, Fed Chairman Jerome Powell’s assertion of aggressively hiking interest rate to restrict price rises resulted in panic selling.  

Nevertheless, U.S. stock markets have corrected to a great extent year to date. The fundamentals of the U.S. economy remain solid despite the fact that inflation is at a 40-year high. Expected rate hikes by the Fed this year seems already factored in the market’s valuation. At his stage, the strategy on “buy on the dip” should be an appropriate one.

A long list of stocks is currently available at an attractive valuation. However, we have selected five U.S. corporate bigwigs with a favorable Zacks Rank. These stocks are — Nucor Corp. (NUE - Free Report) , Cadence Design Systems Inc. (CDNS - Free Report) , GLOBALFOUNDRIES Inc. (GFS - Free Report) , Southwest Airlines Co. (LUV - Free Report) and Copart Inc. (CPRT - Free Report) .

Panic Selling Halts Wall Street’s Relief Rally

On May 18, U.S. stocks markets saw a rout as market participants’ sentiment was significantly dented by inflation fears. The two retail super giants, namely, Walmart and Target, largely missed on earnings due to huge inflationary pressures on logistics and wages.

Moreover, on May 17, the Fed Chair told The Wall Street Journal that the central bank will not hesitate to keep raising the Fed fund rate until inflation comes down to a healthy level. The Fed’s target inflation rate is 2%.

The Fed has already hiked the benchmark lending rate by 75 basis points and has given a clear indication of two more rate hikes of 50 basis points each in June and July. The central bank terminated the $120 billion monthly quantitative easing program in March and will start shrinking its $9 trillion balance sheet from June.

The global supply-chain system is a mess. China is yet to recover from the COVID-19 lockdown. The prolonged war between Russia and Ukraine has elevated prices of crude oil and natural gas. Together Ukraine and Russia were the largest wheat exporters globally. Food inflation has jumped after several Asian and African countries decided to ban exports of agricultural and poultry products.

Several retail supermarkets said that they have found a new trend in which Americans are compelled to spend more on gasoline and food items curtailing their expenditures on discretionary products. Consequently, the fear of a near-term recession has unnerved investors.

Wall Street saw a relief rally from May 13 to 17. However, on May 18, the Dow tumbled 3.6%, marking its biggest decline since June 2020 and the lowest close since March 2021. The S&P 500 slid 4.%, reflecting its worst drop since June 2020. The Nasdaq Composite plunged 4.7%, marking its biggest fall since May 5. Year to date, the Dow, the S&P 500 and the Nasdaq Composite have plummeted 13.3%, 17.7% and 27%, respectively.

Solid Fundamentals of the U.S. Economy

In 2022, the biggest drivers of the U.S. stock markets should be the nation’s strong economic fundamentals. The labor market has returned to the pre-pandemic level. Aggregate demand remained strong despite skyrocketing inflation.

The retail sales and industrial production data for April released on May 17 confirmed that both consumer spending and business investment remained solid amid difficulties. The ISM manufacturing and services indexes remained elevated despite some decline in April.

Moreover, 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.

Our Top Picks

We have narrowed our search to five U.S. corporate bigwigs currently trading at a deep discount to their 52-week highs. These stocks have strong potential for 2022 and have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (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 year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Nucor is committed to expanding its production capabilities and growing its business through strategic acquisitions. NUE has already commissioned some of its growth projects. These should drive growth and strengthen Nucor’s position as a low-cost producer.

NUE is also seeing strong momentum in the non-residential construction market and strong demand in the heavy equipment market. NUE remains focused on achieving greater penetration of the automotive market because of the segment’s long-term growth opportunities. Higher steel prices due to tight supply and higher end-market demand should also drive Nucor’s margins.

Zacks Rank #1 NUE has an expected earnings growth rate of 13.2% for the current-year. The Zacks Consensus Estimate for current-year earnings improved 23.3% over the last 7 days. Nucor is currently trading at a 36.6% discount from its 52-week high.

Cadence Design Systems offers products and tools that help customers design electronic products. Through the System Design Enablement strategy, CDNS offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers.

Cadence’s performance is being driven by strength across segments like digital & signoff solutions and functional verification suite. CDNS is also gaining from higher investments in emerging trends like IoT and autonomous vehicle sub-systems along with strength in the semiconductor end-market. Frequent product launches are expected to help CDNS sustain top-line growth.

Zacks Rank #1 Cadence Design Systems has an expected earnings growth rate of 18.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.3% over the last 30 days. CDNS is currently trading at a 29.3% discount from its 52-week high.

Southwest Airlines is a passenger airline that provides scheduled air transportation in the United States and 'ten near-international' markets. Continued recovery in air-travel demand bodes well for LUV.

Anticipating continued improvement in bookings, Southwest Airlines expects to reap profits in the remaining three quarters of 2022 as well as for the full year. Fleet- modernization efforts of LUV are encouraging as well. Southwest Airlines' liquidity position also raises optimism in the stock.

Zacks Rank #1 LUV has an expected earnings growth rate of more than 100% for the current-year. The Zacks Consensus Estimate for current-year earnings improved 29.1% over the last 30 days. Southwest Airlines is currently trading at a 29.1% discount from its 52-week high.

GLOBALFOUNDRIES operates as a semiconductor foundry worldwide. GFS manufactures integrated circuits, which enable various electronic devices that are pervasive. The company delivers feature-rich solutions which enable its customers to develop innovative products for pervasive chips.

GLOBALFOUNDRIES manufactures a range of semiconductors, including microprocessors, mobile application processors, baseband processors, network processors, radio frequency modems, microcontrollers, power management units, and microelectromechanical systems.

The Zacks Rank #2 GLOBALFOUNDRIES has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 4.6% over the last 7 days. GFS is currently trading at a 32.5% discount from its 52-week high.

Copart provides online auction and a wide range of remarketing services to process and sell salvage and clean title vehicles. High activity levels in the United States are boosting CPRT’s prospects. A rise in claims frequency aided by increased driving activity has fueled the volume growth of Copart.

Robust demand for vehicle remarketing services and higher average selling prices from the international online bidders are driving Copart’s revenues. CPRT’s strong balance sheet and strategic acquisitions are the other positives.

The Zacks Rank #2 Copart has an expected earnings growth rate of 18.7% for the current year (ending July 2022). The Zacks Consensus Estimate for its current-year earnings has improved 0.2% over the last 30 days. CPRT is currently trading at a 33.9% discount from its 52-week high.