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5 Momentum Stocks for February After a Strong January

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Wall Street ended the first month of 2023 with a solid rally after a highly disappointing 2022. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — appreciated 2.8%, 6.2% and 10.7%, respectively.

The Dow and the S&P 500 closed their third positive month in four. The S&P 500 posted the best January since 2019. The Nasdaq Composite ended the best month since July and the best January since 2001.

Favorable data for several measures of inflation, various soft economic data and a resilient labor market raised market participants’ hope for a soft landing of the U.S. economy. At this stage, it should be profitable to invest in momentum stocks with a favorable Zacks Rank. Five such stocks are Archer-Daniels-Midland Co. (ADM - Free Report) , Nucor Corp. (NUE - Free Report) , Steel Dynamics Inc. (STLD - Free Report) , United Rentals Inc. (URI - Free Report) and Ameriprise Financial Inc. (AMP - Free Report) .

Fed Reduces Magnitude of Interest Rate Hike

On Feb 1, in its February FOMC meeting, the Fed hiked the benchmark interest rate by 25 basis points to the range of 4.50% to 4.75%, marking its highest rate since late 2007. Fed Chair Jerome Powell said “We can now say I think for the first time that the disinflationary process has started. However, it would be very premature to declare victory or to think we really got this.”

Powell categorically denied any possibility of a rate cut in 2023. However, the market applauded Powell’s recognition that the disinflationary process has started. A lower interest rate and lighter monetary control will be good for the stock market as it will boost the margins of most companies.

Peak Inflation Seems Behind Us

Less-than-expected inflation rates in October, November and December with respect to several measures have clearly indicated this. The University of Michigan Surveys of Consumers released on Jan 27 showed that the one-year inflation outlook slipped to a final reading of 3.9% this month from 4.4% in December, the lowest reading since April 2021.

On Jan 31, the Department of Labor reported that the employment cost index for fourth-quarter 2022 rose 1% compared with the consensus estimate of a 1.2% rise. The metric for third-quarter 2022 was also 1.2%. Year over year, the employment cost index jumped 5.1% in 2022 compared with 5% in 2021. The recent data clearly indicates that wage rate, a major source of current inflation is declining as expected by the Fed.

Other Positives

The challenges of the pandemic are also behind us. China has been gradually reopening since the beginning of this year after strict lockdowns last year. This will help revive the completely devastated global-supply chain system. Global trade will also gain momentum.

The U.S. labor market remains resilient. The initial results of fourth-quarter 2022 earnings were not as disappointing as expected. Therefore, the Fed may reach its goal of a soft landing of the economy.

Our Top Picks

We have narrowed our search to five momentum stocks. These stocks have seen positive earnings estimate revisions over the last seven days, which indicates that the market is expecting these companies to do solid business in 2023. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Momentum Score of A.  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

Archer-Daniels-Midland. Steady growth in the Nutrition segment of ADM, aided by significant gains in the Human and Animal Nutrition units, remains the key growth driver.

Archer-Daniels-Midland expects the nutrition segment to record operating profit growth going forward. ADM has been significantly progressing on its three strategic pillars — optimize, drive and growth. The Zacks Consensus Estimate for current-year earnings has improved 3.7% over the last seven days.

Nucor is committed to expanding its production capabilities and growing its business through strategic acquisitions. NUE has already commissioned some of its growth projects. These should drive growth and strengthen Nucor’s position as a low-cost producer. NUE is also seeing strong momentum in the non-residential construction market and strong demand in the heavy equipment market.

Nucor remains focused on achieving greater penetration of the automotive market because of the segment’s long-term growth opportunities. Higher steel prices due to tight supply and higher end-market demand should also drive NUE’s margins. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last seven days.

Steel Dynamics is expected to gain from acquisitions as well as strong liquidity and efforts to expand capacity. The acquisitions of Heartland and United Steel Supply have boosted Steel Dynamics' shipping capabilities. Moreover, the buyout of Zimmer should support the raw material procurement strategy at its new Texas flat-roll steel mill.

STLD is also expected to gain from its investments to beef up capacity and upgrade facilities. Steel Dynamics is executing several projects that should add to capacity and boost profitability. The electric-arc-furnace flat roll steel mill should strengthen its steelmaking capacity and value-added product capability. The Zacks Consensus Estimate for current-year earnings has improved 6.8% over the last seven days.

United Rentals is benefiting from the U.S. administration’s increased focus on infrastructural improvement. URI has been gaining from better fleet productivity on broad-based rental demand in construction and industrial verticals. Better fleet productivity on broad-based rental demand in non-residential construction and industrial verticals, higher total and rental revenues and stronger pricing aided URI’s fiscal 2022 results.

United Rentals’  upbeat guidance exhibits broad-based growth across its verticals, with persistent growth opportunities for datacenters, distribution centers and renewables as well as the automotive and ship plants projects. The Zacks Consensus Estimate for current-year earnings has improved 9.8% over the last seven days.

Ameriprise Financial is a leading asset management company. AMP operates through five segments: Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other.

Ameriprise Financial remains well-positioned for impressive top-line growth on the back of its robust assets under management (AUM) balance and business restructuring initiatives. Our estimates for net revenues and total AUM suggest a CAGR of 4.1% and almost 1%, respectively, over the next three years.

Given a solid balance sheet, AMP’s capital deployment activities seem sustainable and will enhance shareholder value. The Zacks Consensus Estimate for current-year earnings has improved 4.2% over the last seven days.

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