U.S. stock markets are rallying this year despite occasional fluctuations. Although it is too early to take a decision, market participants have regained confidence on risky assets like equities to some extent after a terrible 2022. Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have rallied 1.7%, 6.3% and 12.6%, respectively.
This trend is expected to continue as the rate of inflation and consequently the magnitude of the Fed’s interest rate hike has declined. Buoyed by the early 2023 rally, several stocks have popped. We have selected five such stocks with a favorable Zacks Rank and strong upside left.
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.
U.S. Economy is Cooling
The U.S. economy expanded 2.9% in fourth-quarter 2022. Although the metric exceeded the consensus mark of 2.6%, it declined from the third-quarter’s growth rate of 3.2%. The latest projection by the Atlanta Fed revealed that the U.S. economy to expand by 2.2% in first-quarter 2023.
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 and a notable decline in factory orders and industrial production indicated that the U.S. economy is cooling in the desired direction of the Fed.
Moreover, several U.S. corporate behemoths have already retrenched manpower to a good extent at high levels. Lack of earnings visibility due to some near-term concerns related to business opportunities are the primary reasons the recent for job cuts.
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.
Despite the above-mentioned headwinds, the U.S. labor market remains resilient. Nonfarm payrolls in January came in at 517,000 well above the consensus estimate of 198,000. The unemployment rate dropped to 3.4%, below the consensus mark of 3.6%.
Our Top Picks
We have narrowed our search to five large-cap (market capital > $10 billion) stocks that have rallied more than 20% year to date. These stocks have strong growth potential for 2023 and have seen positive earnings estimate revisions in the last 30 days. Finally, each of our picks sports a Zacks Rank #1 (Strong 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 year to date.
Image Source: Zacks Investment Research
MercadoLibre Inc. MELI is benefiting from strength in the commerce and fintech businesses. Robust product offerings and credit portfolio expansion are respectively driving MELI’s commerce and fintech revenues.
Further, a robust mobile-point-of-sale business and the growing adoption of MELI are driving the total payment volume growth of the company. Also, the rapid adoption of Mobile Wallet remains a positive.
MercadoLibre has expected revenue and earnings growth rates of 21.3% and 82.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the last seven days. The stock price of MELI has jumped 36.1% year to date.
Expedia Group Inc. EXPE is benefiting from improvement across all its lines of business, owing to the increasing travel resiliency of people. Moreover, EXPE is experiencing growth in gross bookings. Strong momentum in lodging and air bookings is contributing well to the top-line.
We expect growth in lodging and air revenues in the days ahead. These apart, continuous efforts toward strengthening products and technology offerings are helping EXPE to gain momentum among customers.
Expedia Group has expected revenue and earnings growth rates of 9% and 23.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.7% over the last 30 days. The stock price of EXPE has climbed 34.3% year to date.
United Rentals Inc. URI 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.
URI has expected revenue and earnings growth rates of 20.7% and 26.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.8% over the last 30 days. The stock price of United Rentals has surged 26.6% year to date.
Chewy Inc. (CHWY) is engaged in the pure-play e-commerce business in the United States. CHWY provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its www.chewy.com retail Website, as well as its mobile applications.
CHWY has expected revenue and earnings growth rates of 11.2% and more than 100%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 20% over the last 30 days. The stock price of Chewy has appreciated 21.3% year to date.
Microchip Technology Inc. MCHP is riding on consistent strength in its analog and microcontroller businesses. MCHP’s dominance in 8,16 and 32-bit microcontrollers is driving top-line growth.
Strategic acquisitions like Microsemi and Atmel have expanded the product portfolio. MCHP is gaining from recovery in demand across industrial, automotive and consumer end-markets, on reopening of economies, globally. Collaboration with the likes of AWS is another positive.
Microchip Technology has expected revenue and earnings growth rates of 2.4% and 2.1%, respectively, for next year (ending March 2024). The Zacks Consensus Estimate for next-year earnings has improved 5.2% over the last seven days. The stock price of MCHP has advanced 20.8% year to date.
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