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Buy on the Dip Amid Fed's Tepid Rate Cut Signal: 5 Top Picks
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On Jan 31, the Fed kept the benchmark lending interest rate at the existing range of 5.25-5.5% in its January FOMC meeting. However, causing a huge disappointment to market participants, the central bank clearly said that it is highly unlikely that the first interest rate cut will occur in March.
Fed Chairman Jerome Powell said, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen.”
At the same time, the post-FOMC statement removed the part that signaled the central bank still has a tightening bias. This categorically means that the rate hike rate regime, which started in March 2022, is over.
Powell added, “We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint, at some point this year.”
Following the Fed’s decisions, Wall Street fell sharply. The Dow slid 0.8%, marking its worst day since December. The S&P 500 fell 1.6% to post its worst day since September. The Nasdaq Composite plummeted 2.2%, recording its worst single-day performance since October.
Meltdown is a Temporary Phenomenon
The impressive bull run is set to continue in 2024. The Fed in all probability, will initiate a rate cut latest by June. A lower interest rate regime will boost economic growth speeding up investment by businesses. In 2022, small-cap companies suffered from record-high inflation, a soaring interest rate and fear of an impending recession. However, in 2023, this segment of the economy found some relief from these three concerns. The rate cut will further boost mid and small-sized enterprises.
A lower interest rate regime will be beneficial to high-growth sectors like technology and consumer discretionary. Several companies in these spaces depend on cheap sources of credit as the full potential of their business is realized over a long period. A low risk-free interest rate will reduce the discount rate thereby increasing the net present value of investment in these stocks.
The global supply-chain system has been improving slowly since last year as U.S. corporate behemoths are rescheduling their supply-chain system’s bypassing of China. Moreover, the fundamentals of the U.S. economy remain firm despite record-high inflation and interest rate.
The Department of Commerce reported that the U.S. economy grew at a rate of 3.3% in fourth-quarter 2023, well above the consensus estimate of 2%. The U.S. GDP rose 2.5% in 2023 compared with 1.9% in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. The resilient labor market started showing softness but it hasn’t crumbled. Personal consumption remains robust.
Finally, a preliminary estimate revealed that a massive $1.4 trillion entered U.S. money market funds primarily due to an extremely high interest rate regime, with cash yielding around 5%. A systematic decline in the market interest rate will shift a major part of these gigantic funds to equity markets.
Our Top Picks
In this regard, every dip will be a good buying opportunity even for those stocks that have skyrocketed in 2023 and have strong potential for 2024 and beyond. At this stage, several stocks look attractive for future growth. However, selecting the following four criteria will make the task easy.
First, select corporate bigwigs (market capital > $40 billion) that have a well-established business model and globally acclaimed brand recognition. Second, look for stocks that have strong growth potential for 2024 and beyond.
Third, select stocks have seen positive earnings estimate revisions in the last 60 days. Fourth and most importantly, pick stocks that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Five such stocks are:
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Netflix Inc. (NFLX - Free Report) added 13.12 million paid subscribers globally in fourth-quarter 2023, with a rise of 1% in average revenue per subscription. NFLX attributed the robust top-line growth to its paid subscription-sharing offering (part of its password-sharing crackdown), recent price changes and the strength of its business in general.
NFLX is expected to continue dominating the streaming space, courtesy of its diversified content portfolio, which is attributable to heavy investments in the production and distribution of localized and foreign-language content.
Netflix has an expected revenue and earnings growth rate of 14.3% and 40.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last seven days.
CrowdStrike Holdings Inc. (CRWD - Free Report) is benefiting from the rising demand for cyber-security solutions owing to the slew of data breaches and the increasing necessity for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud-migration strategies adopted by organizations are the key growth drivers.
CRWD’s portfolio strength, mainly the Falcon platform’s 10 cloud modules, boosts its competitive edge and helps add users. Additionally, strategic acquisitions, like that of Humio and Preempt, are expected to drive growth for CRWD.
CrowdStrike has an expected revenue and earnings growth rate of 28.2% and 23.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Arista Networks Inc. (ANET - Free Report) 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 revenue and earnings growth rate of 11.5% and 10.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
The Progressive Corp. (PGR - Free Report) continues to gain on higher premiums, given its compelling product portfolio, leadership position and strength in both Vehicle and Property businesses. Focus on becoming a one-stop insurance destination, catering to customers opting for a combination of home and auto insurance, augurs well for PGR.
Policies in force and retention ratio should remain healthy for PGR. Competitive pricing to retain current customers and address customer needs with new offerings should continue to drive policy life expectancy.
The Progressive has an expected revenue and earnings growth rate of 12.6% and 19.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the last seven days.
Shopify Inc. (SHOP - Free Report) is benefiting from strong growth in the merchant base. SHOP has been focused on winning merchants regularly based on product offerings, including Shop Pay and Shop Pay Installments. The solid adoption of new merchant-friendly applications holds promise.
Partnerships with YouTube, Twitter, Facebook, Instagram, and Google are expected to expand SHOP’s merchant base. The divestiture of the logistics business to Flexport is likely to boost profitability going forward.
Shopify has an expected revenue and earnings growth rate of 19.1% and 49.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 33.3% over the last 60 days.
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Buy on the Dip Amid Fed's Tepid Rate Cut Signal: 5 Top Picks
On Jan 31, the Fed kept the benchmark lending interest rate at the existing range of 5.25-5.5% in its January FOMC meeting. However, causing a huge disappointment to market participants, the central bank clearly said that it is highly unlikely that the first interest rate cut will occur in March.
Fed Chairman Jerome Powell said, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen.”
At the same time, the post-FOMC statement removed the part that signaled the central bank still has a tightening bias. This categorically means that the rate hike rate regime, which started in March 2022, is over.
Powell added, “We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint, at some point this year.”
Following the Fed’s decisions, Wall Street fell sharply. The Dow slid 0.8%, marking its worst day since December. The S&P 500 fell 1.6% to post its worst day since September. The Nasdaq Composite plummeted 2.2%, recording its worst single-day performance since October.
Meltdown is a Temporary Phenomenon
The impressive bull run is set to continue in 2024. The Fed in all probability, will initiate a rate cut latest by June. A lower interest rate regime will boost economic growth speeding up investment by businesses. In 2022, small-cap companies suffered from record-high inflation, a soaring interest rate and fear of an impending recession. However, in 2023, this segment of the economy found some relief from these three concerns. The rate cut will further boost mid and small-sized enterprises.
A lower interest rate regime will be beneficial to high-growth sectors like technology and consumer discretionary. Several companies in these spaces depend on cheap sources of credit as the full potential of their business is realized over a long period. A low risk-free interest rate will reduce the discount rate thereby increasing the net present value of investment in these stocks.
The global supply-chain system has been improving slowly since last year as U.S. corporate behemoths are rescheduling their supply-chain system’s bypassing of China. Moreover, the fundamentals of the U.S. economy remain firm despite record-high inflation and interest rate.
The Department of Commerce reported that the U.S. economy grew at a rate of 3.3% in fourth-quarter 2023, well above the consensus estimate of 2%. The U.S. GDP rose 2.5% in 2023 compared with 1.9% in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. The resilient labor market started showing softness but it hasn’t crumbled. Personal consumption remains robust.
Finally, a preliminary estimate revealed that a massive $1.4 trillion entered U.S. money market funds primarily due to an extremely high interest rate regime, with cash yielding around 5%. A systematic decline in the market interest rate will shift a major part of these gigantic funds to equity markets.
Our Top Picks
In this regard, every dip will be a good buying opportunity even for those stocks that have skyrocketed in 2023 and have strong potential for 2024 and beyond. At this stage, several stocks look attractive for future growth. However, selecting the following four criteria will make the task easy.
First, select corporate bigwigs (market capital > $40 billion) that have a well-established business model and globally acclaimed brand recognition. Second, look for stocks that have strong growth potential for 2024 and beyond.
Third, select stocks have seen positive earnings estimate revisions in the last 60 days. Fourth and most importantly, pick stocks that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Five such stocks are:
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Netflix Inc. (NFLX - Free Report) added 13.12 million paid subscribers globally in fourth-quarter 2023, with a rise of 1% in average revenue per subscription. NFLX attributed the robust top-line growth to its paid subscription-sharing offering (part of its password-sharing crackdown), recent price changes and the strength of its business in general.
NFLX is expected to continue dominating the streaming space, courtesy of its diversified content portfolio, which is attributable to heavy investments in the production and distribution of localized and foreign-language content.
Netflix has an expected revenue and earnings growth rate of 14.3% and 40.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last seven days.
CrowdStrike Holdings Inc. (CRWD - Free Report) is benefiting from the rising demand for cyber-security solutions owing to the slew of data breaches and the increasing necessity for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud-migration strategies adopted by organizations are the key growth drivers.
CRWD’s portfolio strength, mainly the Falcon platform’s 10 cloud modules, boosts its competitive edge and helps add users. Additionally, strategic acquisitions, like that of Humio and Preempt, are expected to drive growth for CRWD.
CrowdStrike has an expected revenue and earnings growth rate of 28.2% and 23.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Arista Networks Inc. (ANET - Free Report) 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 revenue and earnings growth rate of 11.5% and 10.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
The Progressive Corp. (PGR - Free Report) continues to gain on higher premiums, given its compelling product portfolio, leadership position and strength in both Vehicle and Property businesses. Focus on becoming a one-stop insurance destination, catering to customers opting for a combination of home and auto insurance, augurs well for PGR.
Policies in force and retention ratio should remain healthy for PGR. Competitive pricing to retain current customers and address customer needs with new offerings should continue to drive policy life expectancy.
The Progressive has an expected revenue and earnings growth rate of 12.6% and 19.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the last seven days.
Shopify Inc. (SHOP - Free Report) is benefiting from strong growth in the merchant base. SHOP has been focused on winning merchants regularly based on product offerings, including Shop Pay and Shop Pay Installments. The solid adoption of new merchant-friendly applications holds promise.
Partnerships with YouTube, Twitter, Facebook, Instagram, and Google are expected to expand SHOP’s merchant base. The divestiture of the logistics business to Flexport is likely to boost profitability going forward.
Shopify has an expected revenue and earnings growth rate of 19.1% and 49.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 33.3% over the last 60 days.