Inflation Scares Overblown! Grab 5 Growth Stocks Now

A surge in inflation in January possibly leading to faster-than-expected rate hikes triggered a sudden panic among investors. But is inflation actually likely to tick up? 

Many economists believe that the spike in inflation last month will most probably fizz out. The rise in the consumer price index (CPI), especially on a year-on-year basis, remained sluggish. Meanwhile, the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, has been below the central bank’s 2% target since mid-2012. H

Also, wage growth in January doesn’t hint at a surge in the cost of living. This is because the growth was primarily due to seasonal factors that are not likely to last long.

At the same time, stable economic conditions and an impressive Q4 earnings performance will certainly help the broader market move north. Major markets dispelled inflation fears and closed higher for the fifth straight session on Feb. 16, with the Dow closing above the coveted 25,000 mark.

Fear Grips the Markets

Concerns about rise in inflation have certainly triggered the panic. Higher inflation would prompt the Federal Reserve to hike short-term interest rates at a faster pace than expected. This, in turn, will increase borrowing costs for businesses and consumers, which could eventually lead to a slowdown in the economy. Lest we forget, an easy monetary policy helped the equity market notch a nearly nine-year bull run. 

The cost of auto insurance, rent, clothes, gasoline and health care rose in January. As per the Labor Department, the CPI inched up 0.5% in January from the previous month, its biggest increase in five months. Excluding volatile food and energy costs, the so-called core gauge went up 0.3%.

Meanwhile, wage growth hit the fastest pace in January in more than eight-and-a-half years, according to the Labor Department. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009.

Why Did the Markets Overreact?

Most market pundits, however, believe that the reports by the Labor Department are not as bad as they look. To begin with, CPI inflation stayed at 2.1% in January on a year-over-year basis. Thus, it has fallen from the nearly 3% annual growth rate in the last three months.

Also, the  jump in the January CPI report was led by an uptick in the cost of auto insurance. But that was mostly because of an annual price hike that usually happens in the first month of a year. Another anomaly is that a considerable rise in the cost of apparel boosted the CPI. However, such an increase usually happens in January, only to recede later in the year.

If we consider the volatile energy segment, oil prices have surged by one-third since mid-2017 to $66 per barrel, but have fallen below $60 this month and are likely to decline further this year.

Coming to wage growth, the annual hourly gain might be a temporary blip. After all, wages rose on colder-than-normal weather condition, which is a seasonal factor. Further, if we exclude managers and supervisors’ salaries, then hourly wages increased just 2.4%, about the same sluggish pace as in previous months. This shows that much of the increase was not evenly distributed and concentrated mostly on managers.

Fundamentals Remain Strong

Strong economic growth and upbeat corporate earnings should boost investors’ sentiments for now. Consumers and businesses helped the U.S. economy expand at a healthy pace in the last three quarters. Consumer outlays improved on a steady job market and healthier household finances, while the recently-passed tax overhaul policy is expected to give spending a boost this year.

For the 362 S&P 500 members that have reported results, earnings are up 14.5% from the same period last year on 9% higher revenues, with 78.2% beating EPS estimates and 75.4% surpassing revenue estimates. In fact, Q4 earnings among all sectors are expected to be up 13.9% from the same period last year on 8.2% higher revenues. This will follow the 6.7% earnings growth recorded in the third quarter of 2017 on 5.9% higher revenues.

Time to Buy Growth Stocks: 5 Solid Picks

Given this bullishness, investing in growth stocks seems judicious. These stocks are fundamentally sound enough to move north in the near term. With the help of our Style Score system, we have short-listed stocks that hold immense growth potential.

Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of A when combined with a Zacks Rank #1 (Strong Buy) offer the best investment opportunities in the growth investing space.

The Boeing Company BA designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services. The Zacks Consensus Estimate for its current-year earnings increased 26.9% over the last 60 days. The stock, which is part of the Aerospace - Defense industry, is expected its earnings by 35.8% and 15.9% in the current quarter and year, respectively.

PetMed Express, Inc. PETS, doing business as 1-800-PetMeds, operates as a pet pharmacy in the United States. The Zacks Consensus Estimate for its current-year earnings increased 3% over the last 60 days. The stock, which is part of the Internet - Commerce industry, is expected to grow its earnings by 16.2% and 45.3% in the current quarter and year, respectively.

Micron Technology, Inc. MU provides semiconductor systems worldwide. The Zacks Consensus Estimate for its current-year earnings increased 32.2% over the last 60 days. The stock, which is part of the Semiconductor Memory industry, is improve its EPS figures by 198% and 104% in the current quarter and year, respectively.

You can see the complete list of today’s Zacks #1 Rank stocks here.

HCA Healthcare, Inc. HCA, through its subsidiaries, provides health care services in the United States. The Zacks Consensus Estimate for its current-year earnings increased 21.1% over the last 60 days. The stock, which is part of the Medical - Hospital industry, is expected to growth its earnings by 19.5% and 32.2% in the current quarter and year, respectively.

RH RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The Zacks Consensus Estimate for its current-year earnings increased 0.3% over the last 60 days. The stock, which is part of the Retail - Home Furnishings industry, is expected to expand its profits by 129.4% and 132.5% in the current quarter and year, respectively.

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