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Top 5 Momentum Stocks for January After a Disappointing 2022

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U.S. stock markets exhibited the first single-day impressive rally of 2023 on Jan 6 as the three major stock indexes closed sharply higher. A lower wage rate and a contraction in the services sector PMI raised hope that inflation is cooling in the desired direction. At the same time, market participants remained optimistic that a resilient labor market would enable the Fed with a soft landing of the economy.

Momentum investing calls for the continued appraisal of stocks, ensuring that an investor does not pick a beaten-down name or overlook a thriving one. Momentum investors buy high on anticipation that a stock will only ascend in the short to intermediate term. At this stage, momentum stocks with a favorable Zacks Rank are likely to become an ideal combination of investments.

Five such stocks are Arista Networks Inc. (ANET - Free Report) , Conagra Brands Inc. (CAG - Free Report) , DocuSign Inc. (DOCU - Free Report) , Southern Copper Corp. (SCCO - Free Report) and Paylocity Holding Corp. (PCTY - Free Report) .

Recent Positives

The Department of Labor reported that the nonfarm payroll increased 223,000 in December beating the consensus estimate of 208,000. However, December’s job additions fell below November’s data that were revised downward to 256,000 from 263,000 reported earlier.

Hourly wage rate increased 0.3% in December below the consensus estimate of 0.4%. November’s data was revised downward to 0.4% from 0.6% reported earlier. Year over year,  the hourly wage rate increased 4.6% in December compared with the consensus estimate of 5%. The wage rate increased 4.8% year over year in November.

Peak inflation seems behind us. Less-than-expected inflation rates in October and November with respect to several measures have clearly indicated this.

The Institute of Supply Management reported that the services sector index for December plummeted to 49.6% in December from 56.5% in November. The consensus estimate was 55.1%. Any reading below 50% indicates a contraction in services activities. The index contracted for the first time since May 2020, at the onset of the coronavirus pandemic.

A devastated housing market owing to the high mortgage rate, disappointing retail sales in December, the peak festive season, huge inventory accumulation by several retailers, a stiff fall in U.S. manufacturing activities, disappointing sales in December of electric vehicle giant Tesla Inc. (TSLA) and a likely production cut by the global tech behemoth Apple Inc. (AAPL) indicated that the U.S. economy is cooling in the desired direction of the Fed.

Our Top Picks

We have narrowed our search on five momentum stocks with strong potential in 2023. These stocks have seen positive earnings estimate revisions over the last 30 days. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Momentum Score of A or B.  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 month.

Zacks Investment Research
Image Source: Zacks Investment Research

Arista Networks develops markets and sells cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. ANET benefits from the expanding cloud networking market, driven by strong demand for scalable infrastructure. The company recently joined the Microsoft Intelligent Security Association.

Arista Networks continues to gain from solid momentum and diversification across its top verticals and product lines. It is well-poised for growth in the data-driven cloud networking business, with proactive platforms and predictive operations. ANET introduced an enterprise-grade Software-as-a-Service offering for its flagship CloudVision platform.

Arista Networks has an expected earnings growth rate of 18.7% for the current quarter. The Zacks Consensus Estimate for current-quarter earnings improved 0.6% over the last 30 days.

Conagra Brands has been benefiting from its robust pricing actions, which aided the top line in the first quarter of fiscal 2023. Results gained from strength in CAG’s brands, efficient pricing and ongoing execution of the Conagra Way playbook. Conagra Brands delivered improved service and productivity amid the ongoing inflationary pressures and industry-wide supply-chain hurdles.

Management expects the inflationary landscape to persist in fiscal 2023. Nonetheless, pricing and innovation are likely to aid CAG. We expect organic sales to increase 4.9% in fiscal 2023, which is at the higher end of management’s view of 4-5%.

Conagra Brands has an expected earnings growth rate of 11% for the current year (ending May 2023). The Zacks Consensus Estimate for current-year earnings has improved 6.9% over the last seven days.

DocuSign provides a cloud-based, e-signature software platform in the United States and internationally that enables businesses to digitally prepare, execute and act on agreements. DOCU offers services to mortgage, non-profit, government, real estate, insurance, technology and healthcare industries.

The acquisitions of Seal Software and Liveoak Technologies are expected to add functionality to DocuSign Agreement Cloud and significantly expand its eNotary offerings. DOCU remains focused on continuously acquiring eSignature customers, improving its offerings, and expanding internationally.

DocuSign has an expected earnings growth rate of 12% for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 18.8% over the last 30 days.

Southern Copper expects production to recover in 2023 and reach 971,000 tons with Peruvian production coming back on track and new production at Pilares, El Pilar and Buenavista. SCCO’s strict cost control measures will help offset the impact of inflated fuel, labor and operating costs.

Even though copper prices have declined lately, SCCO will be supported by growth in public infrastructure investment in the United States and global initiatives to address climate change. This would support Southern Copper's top-line performance. Backed by industry-leading copper reserves as well as growth investments, SCCO is well poised to continue delivering solid results.

Southern Copper has an expected earnings growth rate of 0.2% for the current year. The Zacks Consensus Estimate for next-year earnings improved 6.3% over the last 30 days.

Paylocity Holding is benefiting from the growing adoption of its solutions among clients with less than 50 employees. Healthy momentum in PCTY’s core and upper end of the market is a tailwind. The release of the Learning Management System and Community portal, which garnered positive feedback from clients, is encouraging.

The addition of on-demand pay to Paylocity Holding’s portfolio is likely to boost client wins going forward. PCTY’s regular investments in technological upgrades, along with product innovation, will continue to boost its top line.

Paylocity Holding has an expected earnings growth rate of 24.6% for the current year (ending June 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days.

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