Wall Street suffered a bloody blow last week after the Fed acknowledged that the U.S. economy is suffering from inflationary pressure and a rate hike may come sooner than expected.
On Jun 16, Fed Chairman Jerome Powell, in his post FOMC statement, indicated that a rate hike may come in late 2023 in contrast to the previous expectation of 2024. Moreover, the tapering of the Fed's $120 billion per month bond-buying program is likely to initiate either in late 2021 or early 2022, though no time-line has been given by the central bank.
Nevertheless, we find a handful of large-cap (market capital > $10 billion) stocks with a favorable Zacks Rank that are currently trading at a stiff discount from their 52-week highs attained this year. At this stage, investment in these stocks may be fruitful as they have strong potential for the rest of 2021 despite Fed's rate hike signal.
Markets reacted immediately to Powell's statement. The yield curve of U.S. government bonds flattened on Jun 18. The yield on short-term 2-Year U.S. Treasury Note rose 0.256% on Jun 18 from 0.149% on Jun 11. On the other hand, the yield on the benchmark 10-Year U.S. Treasury Note that started last week at around 1.45%, jumped to 1.59% on Jun 16 after Powell's statement and reverted to around 1.44% on Jun 18 afternoon.
The narrowing of the spread between the short-term ( 2 or 5 years) and long-term (10 or 30 years) Treasury Notes is often considered as a signal of an impending inflation. Several economists believe that short-term yields moved up in anticipation of a rate hike while long-term yields declined since higher inflation will be detrimental to economic growth.
Moreover, taking a cue from Fed's rate hike signal, mortgage rates climbed. Per the Mortgage News Daily, the average rate on the 30-year fixed mortgage touched 3.25% on Jun 17, its highest since mid-April.
Finally, the ICE U.S. Dollar Index that measures the U.S. Dollar against a basket of six major currencies, surged nearly 2% from Jun 15 to Jun 18. A higher interest rate in the United States will compel investors to hold U.S. dollar-denominated assets.
Consequently, U.S. stocks melted last week. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — tumbled 3.5%, 1.9% and 0.3%, respectively.
The Dow suffered its worst weekly decline since October 2020 while the S&P 500 posted the sharpest weekly decline since February 2021. The tech-heavy Nasdaq Composite dropped marginally as the technology sector itself gained 0.1% last week, much to the surprise of market participants.
U.S. Economic Fundamentals Remain Solid
Supported by the nationwide COVID-19 vaccination drive, a sharp reduction in new coronavirus cases and faster-than-expected reopening, the U.S. economy is witnessing a robust recovery from the pandemic-led disturbances.
U.S. manufacturing is firing on all cylinders, and of late, the services sector is also thriving. Consumer spending, the largest driver of the GDP remains strong buoyed by around $2.3 trillion of forced savings. The labor market is settling down gradually. In fact, Fed officials' informal discussions about a possible deviation from the existing easy-money policy are solely due to an impressive recovery of the U.S. economy, beyond the central bank's own expectations.
The University of Michigan reported that the preliminary data for its consumer sentiment index came in at 86.4% in June compared with 82.9% in May. The sub-index for current economic conditions rose to 90.6% in June from 89.4% in May. Importantly, the sub-index for economic conditions for the next six months increased to 83.8% in June from 78.8% in May.
The Federal Reserve raised the U.S. GDP growth rate for 2021 to 7% in June from 6.5% in March. Several globally recognized economic and financial agencies like the World Bank, the IMF, OECD and oxford Economics also projected U.S. economic growth within the range of 6.5% to 7% for 2021, the highest in 38 years.
Our Top Picks
We have narrowed down our search to five large-cap stocks that have attained a 52-week high this year but are currently trading at a sharp discount. These stocks have strong growth potential for the rest of 2021 and have witnessed solid earnings estimate revisions within the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (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 in the past three months.
Image Source: Zacks Investment Research
Darling Ingredients Inc. DAR develops, produces, and sells natural ingredients from edible and inedible bio-nutrients. It operates through three segments: Feed Ingredients, Food Ingredients, and Fuel Ingredients.
The company has an expected earnings growth rate of 45.4% for the current year. The Zacks Consensus Estimate for the current year has improved 5.2% over the last 30 days. This Zacks Rank #1 stock is currently trading at a 17.7% discount from its 52-week high attained on Mar 15.
Southern Copper Corp. SCCO engages in mining, exploring, smelting, and refining copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 2.3% over the last 30 days. This Zacks Rank #1 stock is currently trading at a 28.6% discount from its 52-week high attained on May 10.
The Boston Beer Co. Inc. SAM produces and sells alcohol beverages primarily in the United States. Apart from its flagship Samuel Adams Boston Lager beer, it offers various beers, hard ciders and hard seltzers under the Samuel Adams, Twisted Tea, Angry Orchard Hard Cider and Truly Hard Seltzer brands.
The company has an expected earnings growth rate of 45.4% for the current year. The Zacks Consensus Estimate for the current year has improved 5.2% over the last 30 days. This Zacks Rank #2 stock is currently trading at a 28.1% discount from its 52-week high attained on Apr 23.
Chewy Inc. CHWY operates as an online pet retailer. It offers pet products which include dry and wet food, toys, mats, biscuits, vitamins and supplements.
The company has an expected earnings growth rate of 11.1% for the current year (ending January 2022). The Zacks Consensus Estimate for the current year has improved more than 100% over the last 30 days. This Zacks Rank #2 stock is currently trading at a 34.6% discount from its 52-week high attained on Feb 16.
Mohawk Industries Inc. MHK designs, manufactures, sources, distributes, and markets flooring products for remodeling and construction of residential and commercial spaces in the United States, Europe, Russia and internationally. It operates through three segments: Global Ceramic, Flooring North America and Flooring Rest of the World.
The company has an expected earnings growth rate of 55.5% for the current year. The Zacks Consensus Estimate for the current year has improved 13.7% over the last 60 days. This Zacks Rank #2 stock is currently trading at a 21.1% discount from its 52-week high attained on May 10.
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