Wall Street has been witnessing extreme volatility since the beginning of 2022, barring a two-month summer rally. Market participants continue to be affected by the after-effects of COVID-19 even though the infection has itself dwindled. These, along with the complete devastation of the global supply-chain system and shortage of labor, have caused the inflation rate to skyrocket to a 40-year high.
In order to combat galloping inflation, the Fed has adopted an ultra-hawkish monetary stance unseen since 1994. Rigorous hiking of the benchmark interest rate and the adoption of a tighter monetary policy have resulted in a surge in U.S. currency.
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 with a favorable Zacks Rank. Five such stocks are —
BJ's Wholesale Club Holdings Inc. ( BJ Quick Quote BJ - Free Report) , NextEra Energy Partners LP ( NEP Quick Quote NEP - Free Report) , Alliant Energy Corp. ( LNT Quick Quote LNT - Free Report) , Potbelly Corp. ( PBPB Quick Quote PBPB - Free Report) and ARMOUR Residential REIT Inc. ( ARR Quick Quote ARR - Free Report) . Surging Interest Rate
The U.S. inflation rate is currently at a 40-year high. In order to combat mounting inflation, the Fed raised the Fed Fund rate from 0-0.25% in early March to 2.25-2.5% in July. Yet, there are no signs of inflation cooling down. After back-to-back FOMC meetings in June and July, the Fed is set to hike the interest rate by another 75 basis points in September.
A section of economists and financial analysts is expecting the central bank to raise the rate by 1% in the September FOMC meeting. Moreover, the Fed terminated the pandemic-led $120 billion of bond-buying program per month in March and has started reducing the size of its $9 trillion balance sheet from June.
Consequently, the yields of U.S. government bonds soared. As of Sep 19, the yield on the benchmark 10-Year U.S. Treasury Note closed at 3.518%, its highest since April 2011. The yield on the short-term 2-year U.S. Treasury Note closed at 3.949%, its highest since 2007. This yield is most susceptible to the Fed’s rate hike strategy. The yield on the long-term 30-Year U.S. Treasury Note closed at 3.521%.
As interest rate surges in the United States, global investors are trying to hold U.S.-dollar denominated assets in order to get higher returns. Consequently, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, has skyrocketed in 2022.
As of Sep 19, the DXY closed at 109.586, climbing 14.6% year to date. The index is currently at its 20-year high. With respect to the U.S. dollar, the British pound is at a 37-year low, the Japanese yen is at a 20-year low and the euro is at a 20-year low. Further, currencies of several major emerging economies have fallen to their historic-low level against the U.S. dollar.
Why Domestic- Focused Stocks?
Market participants are concerned that a rising dollar will hurt the 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 is rock solid. Americans have more than $2 trillion in savings in the last two pandemic-ridden years. 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. This makes them less sensitive to the interest rate movement and 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 past 60 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 in the past three months.
Image Source: Zacks Investment Research BJ's Wholesale Club’s ability to steer the tough retail environment validates its strong customer value proposition and business model. BJ’s relentless efforts to boost membership base, simplify assortments, enhance digital capabilities and accelerate club openings should support sales. We foresee sustained improvement in membership fee income as new club openings ramp up.
Markedly, BJ's Wholesale Club’s acquisition of the perishable supply chain from Burris Logistics puts it in an advantageous position to scale up supply chain capabilities and expand fresh food offerings. A jump of 6% in member count in the second quarter speaks about BJ’s ability to drive traffic. We estimate a 14.3% and 7.1% increase in total revenues in fiscal 2022 and 2023, respectively.
BJ's Wholesale Club has an expected earnings growth rate of 10.8% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings of this Zacks Rank #1 company has improved 7.8% over the past 30 days.
NextEra Energy is expanding domestic clean energy assets through acquisitions and organic initiatives. NEP has stakes in natural gas pipelines in Texas and gains from an increase in natural gas production.
To enhance flexibility, NextEra Energy completed a few financing agreements to secure funds for acquisition. NEP benefits from declining installation costs and improving renewable technology. It has sufficient liquidity to meet obligations.
NextEra Energy has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings of this Zacks Rank #2 company has improved 3.2% over the past 30 days.
Alliant Energy has plans to strengthen and expand its infrastructure, retire coal-fired units, add clean assets to its generation and become carbon neutral by 2050. Electricity generated from clean assets will assist LNT in meeting demand from customers.
Alliant Energy plans to invest $6.1 billion between 2022 and 2025. The returns from regulated assets provide it with earnings visibility. LNT operates primarily through four wholly owned subsidiaries – Interstate Power and Light Co., Wisconsin Power and Light Co., Resource and Corporate Services.
Zacks Rank #2 Alliant Energy has an expected earnings growth rate of 6.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the past 60 days.
Potbelly owns, operates, and franchises Potbelly sandwich shops. PBPB manages establishments for consuming food on premises and offers sandwiches, salads, soups, chili, chips, cookies, ice cream and smoothies. Potbelly serves customers throughout the United States.
Zacks Rank #2 Potbelly has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved more than 100% over the past 60 days.
ARMOUR Residential invests primarily in residential mortgage-backed securities issued or guaranteed by a United States government-chartered entity. ARR’s securities portfolio primarily consists of the U.S. government-sponsored entity's and the Government National Mortgage Administration's issued or guaranteed securities backed by a fixed rate, hybrid adjustable rate, and adjustable-rate home loans, as well as unsecured notes and bonds issued by the GSE and the United States treasuries, and money market instruments.
ARMOUR Residential sports a Zacks Rank #1. It has an expected earnings growth rate of 21.9% for the current year. The Zacks Consensus Estimate for the current year has improved 8.3% over the past 60 days.