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Fed Raises Economic Outlook: 5 Top-Ranked Momentum Picks

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On Mar 21, Fed Chairman Jerome Powell commenced his stewardship of the central bank by raising the benchmark lending rate by a quarter point post the Federal Open Market Committee’s (FOMC) latest policy meeting. Further, the central bank has raised the economic outlook for 2018 and provided robust estimates of several key economic metrics.

Powell stated that the U.S. economy is in the best of health compared with the last 10 years. A set of stimulative policies led by the massive tax cuts in December 2017, a healthy labor market operating near full employment, firmness in overseas growth and accommodative financial conditions have improved consumers income and confidence. Consequently, the blooming economic picture persuaded the central bank to raise the benchmark lending rate.

A strong U.S. economy supported by a robust labor market, low inflationary expectations and anticipation of sustained earnings momentum are likely to uplift investors’ confidence significantly. Considering these positives, momentum stocks with favourable Zacks Rank are lucrative investment options.

Fed Raises GDP Estimates

The Fed also raised its forecast for 2018 GDP growth from 2.5% in December 2017 to 2.7%. Likewise 2019 GDP estimate has been hiked from 2.1% in December 2017 to 2.4%. Economic growth is likely to cool down in 2020 at 2% while the longer-run measures will remain stable at 1.8%.

Trump administration’s decision to cut tax rate from 35% to 21% has been a shot in the arm for the U.S. economy. The new tax bill’s method of dealing with capital expenditure (companies will be able to deduct their capital expenditures from the taxable income immediately) is likely to result in additional investments bolstering productivity. Consequently, economic growth will remain strong for a long period.

Healthy Labor Market

The U.S. jobless rate currently stands at a 17-year low of 4.1%. On Mar 12, the U.S. Labor Department Data revealed that the economy added 313,000 jobs in February 2018, exceeding the consensus estimate of 208,000. Moreover, the total labor force increased by 806,000 and is now pegged slightly below 162 million. This is the highest since September 2003. (Read More: Asia Stocks Gain on Upbeat U.S. Jobs Data: 5 Top Picks)

Fed’s latest projection for the labor market has added a little extra sweetness to the economic scenario. The central bank has reduced its 2018 unemployment rate estimate to 3.8% from 3.9% in December 2017. Unemployment rate is likely to remain stable at 3.6% in 2019 and 2020 better than the central bank’s December projection of 3.9% and 4%, respectively. This indicates that the U.S. labor market will maintain near full employment levels over 2018-2020.

High Inflationary Expectation Overblown

Estimates of inflation remain mostly unchanged by the Fed. This indicates that recent hyper-sensitiveness over inflationary expectation is overblown. PCE inflation and core PCE inflation for 2018 are both projected at 1.9%, at par with December’s projection. This figure is lower than the central bank’s longer-run estimate of 2%. Fed’s projected PCE inflation rates for 2019 and 2020 currently stands at 2% and 2.1%, respectively compared with 2% for both the years estimate during December 2017.

Our Top Picks

The Fed has raised 2018 U.S. GDP growth estimate from 2.5% in December 2017 to 2.7%. Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. economy. Such factors are unlikely to disappear in the near term.

At this stage, investment in stocks with strong earnings momentum will lucrative. Our selection is backed by a good Zacks Momentum Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, we narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Momentum Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Momentum-investing space.

We have picked five stocks each of which carries a Zacks Rank #1 and a momentum style score A.

Performance of our five top-picks in the last six months.

CF Industries Holdings Inc. CF is the global leader in transforming natural gas into nitrogen products. The company has expected earnings growth of 472% for current year. The Zacks Consensus Estimate for the current year has improved by 257.7% over the last 30 days.

Fluor Corp. FLR delivers engineering, procurement, construction, maintenance (EPCM), and project management to governments and clients in diverse industries globally. The company has expected earnings growth of 100% for current year. The Zacks Consensus Estimate for the current year has improved by 37% over the last 30 days.

PDC Energy Inc. PDCE is engaged in acquiring, developing and exploring crude oil, NGLs and natural gas. It has operations primarily in the Western and Eastern regions of the United States. The company has expected earnings growth of 165.8% for current year. The Zacks Consensus Estimate for the current year has improved by 33.9% over the last 30 days.

Kronos Worldwide Inc. KRO is a global producer and marketer of value-added titanium dioxide pigments. The company has expected earnings growth of 62.8% for current year. The Zacks Consensus Estimate for the current year has improved by 33% over the last 30 days.

American Public Education Inc. APEI is an online provider of higher education focused primarily on serving the military and public service communities. The company has expected earnings growth of 18.6% for current year. The Zacks Consensus Estimate for the current year has improved by 40.4% over the last 30 days.

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