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Q3 Likely to Remain Volatile: Top 5 Picks to Stay Safe

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This year, U.S. stock markets have witnessed their worst first half in more than five decades. The 40-year high inflation owing to the complete devastation of the global supply-chain system and shortage of manpower, a higher interest rate regime and tight monetary control by the Fed, and concerns regarding the U.S. economic slowdown and a possible recession in the near term are the primary reasons for the extreme volatility in the stock markets.

These sources of volatility are clinging to Wall Street. Therefore, Wall Street is likely to remain volatile in the third quarter too. At this juncture, it will be prudent to invest in low-beta, high-dividend-paying stocks with a favorable Zacks Rank to safeguard one’s portfolio. Several stocks fulfilling these criteria are currently available.

However, we have selected those stocks that have provided double-digit returns in the first-half of 2022 and still have more upside left. Five such stocks are — American Electric Power Co. Inc. (AEP - Free Report) , Campbell Soup Co. (CPB - Free Report) , The Hershey Co. (HSY - Free Report) , Lockheed Martin Corp. (LMT - Free Report) and Merck & Co., Inc. (MRK - Free Report) .

Third Quarter Likely to Remain Volatile

All the three major indexes recorded their second straight quarterly decline. The S&P 500 declined 18.3% in the second quarter. The last time the broad-market index recorded two straight quarters of decline was in 2015.

The Dow declined 12.8% in the second quarter. The last time the blue-chip index posted declines for two consecutive quarters was in 2015. The Nasdaq Composite too ended the second quarter down 22.4%. The tech-heavy index had recorded two straight quarters of decline for the last time in 2016.

The geopolitical conflict between Russia and Ukraine that started in Feb 24 is continuing. The Chinese economy is yet to return to normalcy after witnessing the largest outbreak of COVID-19 infections in first-half 2022. These two are the main hindrances to the global supply-chain system.

The Fed terminated the monthly $120 billion bond-buy program in March and has started shrinking the size of its $9 trillion balance sheet since June. The central bank has raised the benchmark interest rate from 0-0.25% to 1.50-1.75% in June. Fed Chairman Jerome Powell said that the rate hike will continue till the interest rate come down to its desired level.

The latest data of CME FedWatch has revealed that 82.6% respondents are expecting the Fed to hike the interest rate by 75 basis points in July and 70.8% probability that the central bank will hike the interest rate by 50 basis points in September.

U.S. GDP growth contracted by 1.6% in first-quarter 2022. On Jul 1, the latest data of Atlanta Fed show that the GDP growth is estimated to decline 2.1% in second-quarter 2022. Theoretically, an economy is said to be in recession when the GDP growth rate contracts for two consecutive quarters. Wall Street is expected to react accordingly.

Why Low-Beta High-Yielding Stocks?

At this stage, investment in low-beta (beta > 0 < 1) stocks with a high dividend yield and a favorable Zacks Rank may be the best option. If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if market’s downturn continues, 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 potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 90 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Lockheed Martin is the largest U.S. defense contractor with a steady inflow of orders from its leveraged presence in the Army, Air Force, Navy and IT programs. Consistent level of contract flows and subsequent backlog growth bolster the long-term revenue prospects for LMT. Expansionary U.S. budgets should also boost its business. The F-35 program continues to be a key growth program for Lockheed Martin’s Aeronautics business unit.

Lockheed Martin has an expected earnings growth rate of 18.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 30 days. The stock price of LMT has climbed 22% year to date. It has a current dividend yield of 2.58% and a beta of 0.73.

The Hershey has raised its top and bottom-line view due to robust first-quarter results and greater visibility in 2022. Earnings and sales improved year over year, gaining from higher pricing, volumes and buyouts.

The buyouts of Pretzels, Dot's and Lily's boosted net sales of HSY. Management expects pricing to remain strong in 2022. Also, Hershey has been gaining from its focus on innovation and capacity expansion.

Hershey has an expected earnings growth rate of 11.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 60 days. The stock price of HSY has surged 14.2% year to date. It has a current dividend yield of 1.63% and a beta of 0.33.

Merck has been benefiting from strong sales of  Keytruda, Lynparza and Bridion. With continued label expansion into new indications & early-stage settings, Keytruda is expected to remain a key top-line driver of MRK.

Animal health and vaccine products are the core growth drivers. Merck’s new COVID oral antiviral pill, Lagevrio will be a key top-line driver in 2022. MRK boasts a strong cancer pipeline, including Keytruda, which should help drive long-term growth.

Merck has an expected earnings growth rate of 21.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 7 days. The stock price of MRK has rallied 20.6% year to date. It has a current dividend yield of 2.99% and a beta of 0.35.

Campbell Soup manufactures and markets food and beverage products. CPB’s pricing actions, supply chain productivity improvements as well as cost-saving initiatives have been aiding amid a rising cost scenario.

Robust pricing; supply-chain productivity and cost-saving efforts, and a better labor outlook and easier year-over-year comparisons, are likely to lead to margin progress and earnings recovery in the second half of fiscal 2022. Apart from this, Campbell Soup is benefiting from strength in its Snacks business, as well as focus on core strategies like innovation.

Campbell Soup has an expected earnings growth rate of 2.9% for next year (ending July 2023). The Zacks Consensus Estimate for next-year earnings has improved 1.7% over the last 30 days. The stock price of CPB has advanced 11.6% year to date. It has a current dividend yield of 3.05% and a beta of 0.37.

American Electric boasts a stable earnings base of approximately 5.5 million customers across more than 11 states. AEP’s investment strategy includes incremental investments in renewable generation projects.

American Electric owns the nation's largest electricity transmission system and more than 224,000 miles of distribution lines. AEP plans to invest $24.8 billion in regulated operations, contracted renewables and wires during the 2022-2026 period, which will assist it in achieving the long-term earnings growth of 6-7%.

American Electric has an expected earnings growth rate of 5.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 90 days. The stock price of AEP has gained 10.1% year to date. It has a current dividend yield of 3.19% and a beta of 0.36.