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Top 5 U.S.-Focused Stocks to Tap Higher Interest Rate Forecast

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The Fed is on track for its June FOMC scheduled on 14 and 15. Fed Chairman Jerome Powell announced in the May FOMC statement that the central bank will raise the benchmark interest rate by 50 basis points in both June and July.

However, on Jun 13, the Wall Street Journal reported that Fed officials are seriously considering hiking the lending rate by 75 basis points in June and July to combat mounting inflation. Several major investment bankers and economists have agreed with the WSJ report.

A higher interest rate regime has already raised the value of the U.S. dollar in the international market. At this stage, it will be fruitful to invest in stocks of domestic-business-oriented companies. Five such stocks are — Vistra Corp. (VST - Free Report) , Boot Barn Holdings Inc. (BOOT - Free Report) , Meritage Homes Corp. (MTH - Free Report) , J.Jill Inc. (JILL - Free Report) and Bally's Corp. (BALY - Free Report) .

Higher Interest Rate Ahead

The Fed raised the Fed Fund rate by 25 basis points in March and 50 basis points in May. The central bank terminated the $120 billion per month quantitative easing program in March and started systematically reducing the size of its $9 trillion balance sheet since June 2022. Yet, inflation data are showing no signs of abatement.

This had an immediate effect on markets as the yield curve of government bonds flattened, mortgage rates climbed and the ICE U.S. Dollar Index jumped.
On Jun 14, the yield on the benchmark 10-Year U.S. Treasury Note rose 11.1 basis points to end at 3.483%. The yield on the short-term 2-Year U.S. Treasury Note closed at around 3.437%, climbing 16 basis points, marking its highest since 2007. The yield on the long-term 30-Year U.S. Treasury Bond rose 6 basis points to 3.428%.

Mortgage rates have surged this week. According to Mortgage News Daily, the average rate on the benchmark 30-year fixed mortgage rate rose 10 basis points on Jun 14 following a 33 basis points jump on the previous day. On the same day, the rate closed at 6.28%, marking its highest since the so-called taper tantrum in July 2013. The mortgage rate was around 5.55% just a week ago.

On Jun 14, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, was up 0.4% to 105.52, reflecting its highest level in nearly two decades.  The expectation of an aggressive interest rate hike by the Fed this year made U.S. dollar highly attractive to investors.

Why Domestic- Focused Stocks?

Market participants are concerned that a rising dollar will hurt sales of U.S. multinational companies as their products will be more expensive in the international markets. Domestic business-oriented companies are mostly immune to any external shock since the United States is the lone market for their products.

Despite the recent economic slowdown, aggregate demand in the U.S. economy remained rock sold. Americans have more than $2 trillion in savings. The Fed is trying to cool demand by an aggressive rate hike and liquidity reduction from the system to combat higher inflation.

In order to fund expansion, these companies are less likely to take the debt route compared with their large peers making them less sensitive to the interest rate movement. This will help them to outperform the broader market.

Our Top Picks

We have narrowed our search to five domestic business-oriented U.S. stocks that have solid potential for the rest of 2022. These stocks 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 three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Vistra operates as an integrated retail electricity and power generation company. VST operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. The company retails electricity and natural gas to residential, commercial, and industrial customers across 20 states in the United States and the District of Columbia.

Vistra has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.2% over the last 60 days.

Boot Barn Holdings operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. In addition, BOOT provides gifts and home merchandise.

Boot Barn Holdings’ products include boots, denim, western shirts, cowboy hats, belts and belt buckles, and western-style jewelry and accessories. BOOT also offers rugged footwear, outerwear, overalls, denim, and shirts, as well as safety-toe boots, and flame-resistant and high-visibility clothing. It sells its products through bootbarn.com.

Boot Barn Holdings has expected earnings growth of 4.4% for the current year (ending March 2023). The Zacks Consensus Estimate for current-year earnings has improved 18.4% over the last 60 days.
Meritage Homes designs and builds single-family homes in the United States.

MTH has been gaining from higher demand arising from the low supply of new and resale housing inventory. Meritage Homes’ strategy of targeting entry-level/first move-up buyers is gaining traction and will continue to boost its performance in the long haul.

Meritage Homes has expected earnings growth of 42.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.4% over the last 30 days.

J.Jill operates as a specialty retailer of womens apparel. JILL offers sweaters, tops, pants, dresses, shorts, skirts, sleepwear and accessories. J.Jill markets through retail stores, website and catalog.

J.Jill has expected earnings growth of 25.4% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings has improved 19.2% over the last 7 days.

Bally's owns and manages casinos, horse racetrack and authorized OTB licenses principally in Colorado. BALY’s properties include Twin River Casino Hotel, Tiverton Casino Hotel, Hard Rock Hotel & Casino, Casino Vicksburg, Dover Downs Hotel & Casino, Casino KC, Golden Gates Casino, Golden Gulch Casino, Mardi Gras Casino and Arapahoe Park racetrack.

Bally's has expected earnings growth of 20% for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 60 days.