- If the Federal Reserve achieves a soft economic landing, these seven stocks will win.
- JPMorgan Chase (JPM): You can’t have a bull market without the top bank in the country.
- Knowledge base home (KBH): Homebuilders are priced like it’s 2008 again. We’re not, and KB Home at 4x earnings is a bargain.
- Visa (V): will continue to gain momentum as global travel and spending continues to rebound.
- Polaris (IIP): Manufacturers of consumer cyclicals like Polaris will benefit from strong spending patterns in 2022.
- Ford (F): Automaker valuations are too low and are already pricing in a significant recession.
- Airbnb (ABNB): The company just reported massive profits but still sold.
- Enlarge video (ZM): At least some of the once high-flying software stocks will rebound. Zoom is a good candidate.
The Federal Reserve faces a daunting challenge. It must control galloping inflation without paralyzing the economy. Fed Chairman Jerome Powell took a big step in trying to meet those targets on Wednesday, when he announced the Fed’s interest rate hike of 50 basis points. At his press conference, Powell said the Fed was working “quickly” to get inflation under control.
For a moment, it seemed Powell struck the right tone with those comments. the S&P500 jumped 3% on Wednesday, marking one of its best days of the past year. After a month of relentless decline in stock prices, there was hope. But then the market immediately returned those gains on Thursday and Friday. Still, while the market remains uncertain, recent price action around the Fed’s decision shows the market is ready for a serious upside move if and when the Fed can bring inflation to a more manageable level. .
In other words, if the Fed can really make the necessary adjustments to bring inflation under control, the stock market could be ready for a major rally. For investors convinced that the economy still has better days ahead, these seven stocks should lead the way in the months ahead.
|KBH||Knowledge base home||$33.21|
JPMorgan Chase (JPM)
You cannot have a healthy economy and stock market without a strong financial system. Bank credit is the oxygen that keeps the economic fire going. And JP Morgan (NYSE:JPM), as one of the nation’s largest and best-run commercial and investment banks, is a key barometer of overall economic health.
With JPM shares down nearly 25% year-to-date, it’s clear investors don’t like what they’re seeing right now. However, the bank’s actual results have been strong. JPMorgan’s first quarter results are commendable in many ways. Yes, the headline profit figure was missed as the bank builds reserves for potential future credit losses. However, actual operating results and metrics such as net interest earned continue to improve.
If the economy surprises on the upside and the bulls regain the upper hand, JPM stock at 11 times earnings and a 3.3% dividend yield is quite the offer. Shares are now down almost 10% since the start of 2020. It’s hard to believe that JPM stock is worth less now than it was before the start of Covid-19, but that’s where so are things today. Once the current bout of pessimism subsides, JPM stock should enjoy a quick rebound.
KB Home (KBH)
One of the major turning points in the market last week came during Powell’s Q&A session. In it, a reporter asked Powell if the Fed would be open to an aggressive 75 basis point rate hike in upcoming meetings. Powell unequivocally dismissed that idea, saying future Fed rate hikes would be more measured.
It was the best possible news for the housing market, and homebuilders like Knowledge base home (NYSE:KBH) specifically. Investors seemed to have this sense of trepidation that the Fed was going to raise rates so aggressively that it would send the economy straight into a recession. However, the Fed seems willing to chart a moderate course.
After falling by a third over the past year, KBH stock is now trading – get this – at less than 4 times forward earnings. Analysts expect more than $10 per share in earnings for KB Home this year, but the stock is selling for just $33 per share. It looks like investors are reliving their nightmares from 2008 when the real estate market crashed. However, the market is structurally much healthier today than during this crisis. People will be looking at price-to-earnings ratios below 4x in 2022 for shocked homebuilders. Unless the economy picks up tomorrow, KBH stock is way too cheap.
Visa (NYSE:V) is, more or less, a small tax on world trade. Visa takes a fraction of a million transactions every day in almost every country in the world. As economic activity picks up globally, Visa is benefiting. It is particularly linked to international travel, as it can charge much higher transaction fees on purchases made in a foreign currency.
Limits on international travel have really hurt Visa’s growth over the past two years. However, the company should be able to post strong numbers in 2022 as the global economic reopening continues to progress. Visa reported strong quarterly earnings in the first quarter of this year; this was a welcome surprise, as many large-cap companies have been posting disappointing numbers lately. V stock is expected to return to 52-week highs once the market downturn subsides.
Polaris (NYSE:IPI) is a leading manufacturer of snowmobiles and all-terrain vehicles (ATVs). It is quite a cyclical activity. The demand for these types of vehicles is highly dependent on economic conditions and also, for snowmobiles, on the amount of snowfall in a given winter.
These types of cyclical stocks can be excellent investment opportunities during a bull market. Unsurprisingly, PII stock has slumped lately as traders scramble to clear a possible recession.
The fact is, however, that PII stock has already returned to pre-Covid levels. Meanwhile, business is less cyclical than people might fear. It has increased its revenue every year sequentially since 2017. Meanwhile, sales have only increased by 17% in 2021, it is not a company that has experienced a sudden windfall due to buying habits related to the pandemic. PII stock is just 10x forward earnings and should see a strong rally as consumer spending remains robust this year ahead.
Automakers have become real battlefield actions. On the one hand, there is the ever-hidden threat of You’re here (NASDAQ:TSLA) and other electric vehicle (EV) manufacturers in terms of disrupting the existing order. On the other hand, the global shortage of semiconductors has made life exceptionally difficult for major manufacturers such as Ford (NYSE:F).
It’s a glass half full situation, however. Supply chain shortages have hurt as much as they have precisely because demand is so high. If Ford can get the parts it needs, it should be able to generate record profits in the current economic environment. And if the Fed manages to manage a soft landing, pent-up consumer demand should keep car sales high for the next few years. With F stock down 35% year-to-date, stocks are now worth less than 8x earnings. It’s a bargain if you’re optimistic about the economy.
Airbnb (NASDAQ:ABNB) shows the dangers of being considered a tech value in today’s environment. At its core, Airbnb is a leisure and hospitality business and is heavily influenced by macroeconomic factors such as international travel demand, airfare prices, levels of Covid-19 restrictions, etc.
And yet, because Airbnb uses a technology platform to deliver its services, it ends up operating as if it were just another software-as-a-service (SaaS) company. Lately, it’s been nothing but bad news for a stock’s prospects.
Video zoom (ZM)
Finally, it is worth supplementing the list with pure growth value. If the bull market is still alive and well, some of these downed software companies will stage huge rallies. Zoom (NASDAQ:ZM) seems to be one of the survivors of this current growing pains.
On the one hand, Zoom is very cost effective. ZM stock trades at 27 times forward earnings. Yeah, that’s earnings, not revenue or EBITDA or other such metrics. Based on earnings, Zoom is now selling at the same valuation ratio as Coca Cola (NYSE:KO).
Now, of course, Coke is a more stable long-term company. However, there is not much growth in soft drinks anymore. By contrast, analysts still believe Zoom will be able to grow revenue at a double-digit rate for at least the next few years.
27 times earnings isn’t a bad price at all for Zoom if it’s able to manage its transition from a stay-at-home superstar to a more stable big tech company. ZM shares have been absolutely devastated over the past year as revenue growth slowed. But it has a large user base and solid profitability metrics to protect it from the current market storm.
As of the date of publication, Ian Bezek held a long position in PII and V shares. The views expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.