Wall Street is reeling under extreme volatility since the beginning of 2022. Investors are highly concerned about soaring inflation. Moreover, the uncertainty regarding the pace and magnitude of an interest rate hike by the Fed to contain inflation has led to severe fluctuations in day-to-day trading since the beginning of this month.
The technology stocks are the major casualties of market participants’ anticipation of a tougher-than-expected Fed in 2022. Consequently, the tech-heavy Nasdaq Composite Index has suffered a bloody blow so far this year.
However, we have identified five stocks listed in Nasdaq Composite with a favorable Zacks Rank that have popped in 2022 despite the index’s recent bloodbath. These are Splunk Inc. SPLK, Vertex Pharmaceuticals Inc. VRTX, Henry Schein Inc. HSIC, Jack Henry & Associates Inc. JKHY and Check Point Software Technologies Ltd. CHKP.
Fed Likely to Take Tougher Monetary Stance
In the United States, several measures of inflation are currently at 40-year high levels. In order to combat skyrocketing inflation, the Fed terminated its $120 billion per month bond-buy program in March and raised the benchmark interest rate by 25 basis points for the first time in three years. On Apr 5, Fed Governor Lael Brainard said that a steady increase in the benchmark interest rate and an aggressive balance sheet reduction is needed to bring back the price level.
The March FOMC minutes also revealed that Fed officials almost unanimously agreed that the central bank must reduce the size of its $9 trillion balance sheet by around $95 per month starting from May. Moreover, the minutes revealed that most officials have agreed that the Fed must raise the interest rate by 50 basis points in the next two FOMC’s in May and June.
As a result, the term structure of the U.S. government bond yield has stiffened recently. On Apr 8, the yields on the benchmark 10-Year U.S. Treasury Note jumped to 2.7%, its three-year high. The yield was 1.5% at the beginning of 2022. The yield on the short-term 2-Year U.S. Treasury Note and long-term 30-Year U.S. Treasury Note closed at more than 2.5% and 2.72%, respectively.
Nasdaq Composite Tumbles
Higher market risk-free returns mean a higher discount rate for future cash flows from stock investing. This will affect growth-oriented stocks — especially technology stocks — as these generally provide higher returns over the long term. Moreover, these companies depend on easy access to cheap credit to expand their businesses.
As a result, the tech-laden Nasdaq Composite has plummeted 14.5% year to date. The other two major stock indexes, namely, the S&P 500 and the Dow are down 7.7% and 5.8% year to date. Notably, the Nasdaq Composite rallied 43.6% and 21.4% in the pandemic-ridden 2020 and 2021, respectively. The index is currently trading at a 17.5% discount to its all-time high of 16,212.23 attained on Nov 22, 2021.
Our Top Picks
At this juncture, we have narrowed our search to five Nasdaq Composite listed stocks that have witnessed double-digit rally year to date. These stocks have strong growth potential for 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Splunk has been gaining from strong execution across its platform, observability and security businesses as businesses partner with it to secure their infrastructure. SPLK’s software can be deployed in various computing environments, from a single laptop to large distributed data centers. The integration with Amazon Web Services security hub for accelerated response to help customers from potential threats is a new catalyst for Splunk.
Splunk has an expected earnings growth rate of 85.6% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings improved more than 100% over the last 60 days. The stock price of SPLK has advanced 12.8% year to date.
Vertex’s cystic franchise sales continue to grow despite the impact of the pandemic. Trikafta/Kaftrio’s early approval/launch were a significant milestone. New reimbursement agreements in ex-U.S. markets and label expansions to younger age groups in United States are driving VRTX’s Trikafta/Kaftrio sales higher.
Vertex’s non-CF pipeline is progressing rapidly with data from multiple programs expected in the next few months. Vertex faces only minimal competition in its core CF franchise. Vertex has collaborations with several companies.
Vertex has an expected earnings growth rate of 12% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 30 days. The stock price of VRTX has jumped 28% year to date.
Henry Schein is a leading distributor of health care products and services across the globe. HSIC’s international performance was also impressive. In the International Dental business, Henry Schein registered strong sales growth in the U.K., driven by continued recovery. Growth within Henry Schein One continues to be driven primarily by a recovery in patient traffic in dental offices. Further, expansion of the gross margins bodes well.
Henry Schein has an expected earnings growth rate of 7.5% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.3% over the last 60 days. The stock price of HSIC has appreciated 17.4% year to date.
Jack Henry is benefiting from its solid momentum across Core, Payments, Complementary and Corporate segments. Moreover, growing adoption of these solutions is driving JKHY’s top-line growth. Further, rising data processing and hosting fees are accelerating services and supporting revenues of Jack Henry.
Jack Henry’s growing digital revenues are contributing well. Additionally, hike in remittance fees and growth in card processing transaction volumes are tailwinds. Paycheck Protection Program lending line also remains a major positive for the processing revenues of JKHY.
Jack Henry has an expected earnings growth rate of 16.5% for the current year (ending June 2022). The Zacks Consensus Estimate for current-year earnings improved 0.8% over the last 60 days. The stock price of JKHY has surged 20.2% year to date.
Check Point is benefiting from growth in security subscriptions, aided by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. Increased demands for network security gateways to support higher capacities are aiding the adoption of CHKP’s remote access VPN solutions.
Several Infinity deals in various industries, including government, telecommunication and industrial are positives. Acquisitions have helped Check Point to broaden its portfolio and enter newer markets, which have eventually driven its revenues. CHKP continues to win new customer accounts, which is boosting revenues.
Check Point has an expected earnings growth rate of 3.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 60 days. The stock price of CHKP has climbed 20.8% year to date.
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Check Point Software Technologies Ltd. (CHKP) : Free Stock Analysis Report
Vertex Pharmaceuticals Incorporated (VRTX) : Free Stock Analysis Report
Henry Schein, Inc. (HSIC) : Free Stock Analysis Report
Jack Henry & Associates, Inc. (JKHY) : Free Stock Analysis Report
Splunk Inc. (SPLK) : Free Stock Analysis Report
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