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October CPI Data Raises Hope for a Soft Landing: 5 Top Picks

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Nov 10 ushered in a silver lining for Wall Street behind the dark clouds seen in 2022. The Bureau of Labor Statistics reported that the consumer price index (CPI) for October came lighter than market’s expectation, and U.S. stock markets shot up on the belief that the peak of inflation is behind us.

October’s CPI data has significantly strengthened the ongoing Wall Street rally that started last month and paved the way for a year-end rally too. Historically, the last two months of any year have been favorable for investors. Moreover, the global financial market is abuzz  with a rumor that China may reopen from COVID-19 restrictions.

Therefore, the stage has been set for a bull run unless any external shock like a geopolitical conflict creates a hurdle. To gain from this ongoing rally, we have selected five U.S. corporate giants with a favorable Zacks Rank and strong business potential for the rest of 2022. These are — Caterpillar Inc. (CAT - Free Report) , McKesson Corp. (MCK - Free Report) , Marathon Petroleum Corp. (MPC - Free Report) , O'Reilly Automotive Inc. (ORLY - Free Report) and Humana Inc. (HUM - Free Report) .

Inflation Seems to be Dwindling

The Department of Labor reported that CPI in October rose 0.4% month over month and 7.7% year over year. The consensus estimate was 0.5% for the month-over-month rise and 7.9% for the year-over-year gain. Core CPI (excluding volatile food and energy items) increased 0.3% month over month and 6.3% year over year. The consensus estimate was of a rise of 0.5% month over month and 6.5% year over year.

The decline in CPI and core CPI may be marginal but peak inflation seems behind us. In fact, economic indicators like a tepid housing sector, declining commodity prices (except food and energy), growing accumulation of inventories on the part of manufacturers and retailers, gradual slowdown of the ISM manufacturing PMI and a decline in the job openings rate were pointing to the cooling down of the U.S. economy.

Consequently, the three major stock indexes  — the Dow, the S&P 500 and the Nasdaq Composite — rallied 3.7%, 5.5% and 7.4%, respectively, marking their best single-day performance in more than 30 months. The small-cap benchmark — the Russell 2000 — also surged 6.1%.

Can Fed Delivers a Soft Landing?

After the release of the October CPI data, the CME FedWatch shows that there exists an 80.6% probability, against a 56.8% probability just a day ago that the Fed will raise the benchmark lending rate by 50 basis points in December.

The ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, fell 2.4% to 107.85 from 113 in Nov 3. The index soared to its 20-year high of 114.24 in Sep 27. Global financial markets were rattled by a skyrocketing dollar.  

The yield on the benchmark 10-Year U.S. Treasury Note dropped 33 basis points to 3.828%. The interest-rate-sensitive yield on the short-term 2-Year U.S. Treasury Note fell 30 basis points to 4.32%. Investors were highly concerned about an imminent recession due to the soaring risk-free market rate.

Moreover, U.S. GDP has grown 2.6% in the third quarter, beating the consensus estimate of 2.2%. Market participants were worried that the economy might enter into a recession after it contracted in the first two quarters of this year.

The labor market is currently at the pre-pandemic level with an unemployment rate of 3.7%. Finally, despite several major headwinds, the overall management guidance in the third-quarter 2022 earnings season was fairly good.

Therefore, a strong U.S. economy and slowing inflation may enable the Fed to perform the herculean task of a soft landing of the economy.

Our Top Picks

We have narrowed our search to five U.S. corporate behemoths with solid growth potential. These companies have seen positive earnings estimate revision in the last seven days indicating that the market is expecting them to do robust business in the near term. 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 in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Marathon Petroleum is poised for further price gains based on a slew of positives. MPC’s $21 billion sales of its Speedway retail business provided it with a much-needed cash infusion. The deal also comes with a 15-year fuel-supply agreement under which Marathon Petroleum will supply 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream.

MPC’s exposure to more stable cash flows from the logistics segment diversifies the earnings stream and offers a buffer against the volatile refining business. Consequently, Marathon Petroleum is primed for significant capital appreciation and is viewed as a preferred downstream operator to own now.

Marathon Petroleum has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.4% over the last seven days.

McKesson provides pharmaceuticals and medical supplies in the United States and internationally. The strong fiscal first-quarter show by three of the four segments of MCK is encouraging. A strong earnings outlook for fiscal 2023 instill optimism.

Strong adjusted operating profit growth across the key segments of MCK is encouraging. A strong position in the Distribution market continues to favor the stock. McKesson played a crucial role in the COVID-19 response efforts in the United States and abroad via the distribution of COVID-19 vaccines, ancillary supply kits, and COVID-19 tests.

McKesson has an expected earnings growth rate of 4.5% for the current year (ending March 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last seven days.

Humana’s Medicaid business, buoyed by several contract wins and renewals, has been strongly contributing to its top line for years. Buyouts and alliances place HUM well for growth. Humana has been deploying excess capital for several years on balance sheet strength. HUM’s solid contributions from the Retail and Healthcare Services units are its major positives.

Humana has an expected earnings growth rate of 21.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.

Caterpillar’s revenues and earnings grew year over year for six straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of the ongoing supply chain snarls and cost pressures. We expect CAT’s adjusted earnings per share for 2022 to grow 11.6%, while revenues are predicted to rise 11.2%. The Construction Industries segment is expected to benefit from the rising construction activities in the United States and other parts of the world.

Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. CAT’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives will help Caterpillar deliver outsized returns.

Caterpillar has an expected earnings growth rate of 24.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.6% over the last seven days.

O'Reilly Automotive has been generating record revenues for 29 consecutive years on the back of growth in the auto parts market. For the current year, ORLY projects total revenues within $14-$14.3 billion for 2022, up from $13.3 billion generated in 2021.

ORLY is poised to benefit from store openings and distribution centers in profitable regions. O’Reilly’s diverse product portfolio catering to DIY and DIFM customers is driving comps growth. Mayasa Auto Parts buyout, ORLY’s first international expansion transaction, has bolstered its growth prospects.

O'Reilly Automotive has an expected earnings growth rate of 4.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last seven days.

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