Yahoo Finance U.S. Economy Suffering From Dichotomy: 5 Safe Stocks
U.S. stock markets have witnessed rangebound trading in the past two weeks. Investors seem confused about the movements of the market. The primary reason is that the U.S. economy is currently facing a dichotomy. At present, the positive factors and the negative factors carry equal weight. This makes market participants decision tough.
Positive Influences on Market
The consumer price index (CPI) rose 5% year over year in March, versus the consensus estimate of 5.1%. Excluding volatile food and energy items, core CPI rose 5.6% year over year, a considerable decline from 9.1% in June 2022. However, in absolute term inflation remains well above the Fed’s 2% target.
The resilient labor market has shown cracks. Nonfarm payrolls in March came in at 236,000 compared with 326,000 in February. Although the unemployment rate edged down to 3.5% in March from 3.6% in February, that was due to an increased labor force participation rate, marking the highest level from the pre-pandemic era.
The hourly wage rate increased 4.2% year over year in March, reflecting its lowest monthly gain since June 2021. Moreover, job openings in February fell 632,000 month-over-month to 9.93 million. The metric fell below 10 million for the first time in nearly two years.
Consumer spending especially retail sales has declined considerably. The manufacturing PMIs have been decreasing for a long period. The housing market has dwindled. All these factors indicate that the economy is cooling per the Fed’s expectations.
Consequently, market participants are expecting the central bank to hike the benchmark lending rate by 25 basis points in the May FOMC meeting and thereafter keep the rate static till the end of 2023. The current Fed fund rate is 4.75 to 5%. Notably, after the March FOMC, Fed Chairman Jerome Powell also indicated that the terminal rate would be around 5.125% for this rate hike cycle.
Fed and Banking Crisis Weigh on Wall Street
On Apr 12, the Fed released the minutes of its March FOMC meeting. The minutes clearly showed that members are concerned that the banking sector crisis in early March is likely to push the economy into recession later this year. The central bank has projected that the United States may take two years to return to normalcy even if the recession is a mild one.
On Mar 10, the Federal Deposit Insurance Corp. (FDIC) announced that regulators closed Silicon Valley Bank (SVB) and took control of its deposits. This was the biggest bank failure in the United States since the collapse of Washington Mutual in 2008 and the second-biggest bank failure in the nation’s history.
The 40-year-old highly respected regional bank, which lends primarily to technology and biotechnology startups, was the first major victim of the aggressive interest rate hike policies adopted by the Fed to combat record-high inflation.
Market participants are highly concerned that the collapse of SVB will significantly dent the confidence of U.S. small and mid-sized banks. The SVB takes centerstage, providing seed capital, which is extremely important for early-stage startups. Following the collapse of SVB, venture capitalists and private equities will be under pressure to raise more capital.
The Fed’s March FOMC minutes clearly indicated that much hyped soft landing of the U.S. economy is currently a remote possibility. More visibility regarding a near-term recession will be available following first-quarter 2023 earnings results along with management guidance and business outlook.
Stock Selection Process
At this stage, it will be prudent to invest in defensive stocks like consumer staples, utilities, and healthcare with strong momentum. We have selected five such stocks that have strong potential for 2023 and have seen positive earnings estimate revisions in the last 60 days.
Each of our picks carries a Zacks Rank #2 (Buy) and has a Momentum Score of A or B. 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 in the past three months.
Image Source: Zacks Investment Research
Conagra Brands Inc. CAG has been benefiting from its robust pricing actions, which aided the top line in the first quarter of fiscal 2023. Results gained from strength in CAG’s brands, efficient pricing and the ongoing execution of the Conagra Way playbook. Conagra Brands delivered improved service and productivity amid ongoing inflationary pressures and industry-wide supply-chain hurdles.
Management expects the inflationary landscape to persist in fiscal 2023. Nonetheless, pricing and innovation are likely to aid CAG. We expect organic sales to increase 4.9% in fiscal 2023, which is at the higher end of management’s view of 4-5%.
Conagra Brands has an expected revenue and earnings growth rate of 7% and 15.7%, respectively, for the current year (ending May 2023). The Zacks Consensus Estimate for current-year earnings has improved 2.6% over the last seven days.
Coty Inc. COTY has been benefiting from its focus on six strategic pillars aimed at sustainable growth. These include stabilizing Consumer Beauty brands, strengthening e-commerce and establishing a solid skincare portfolio, among others.
COTY made several strategic partnerships to enhance its brand portfolio. Management raised its like-for-like sales view for fiscal 2023. COTY is committed to saving initiatives, pricing actions and persistent premiumization to counter inflationary headwinds.
Coty has an expected revenue and earnings growth rate of 1.1% and 32.1%, respectively, for the current year (ending June 2023). The Zacks Consensus Estimate for current-year earnings has improved 2.8% over the last 60 days.
New Jersey Resources Corp. NJR is an energy services holding company that provides safe and reliable natural gas and clean energy services, including transportation, distribution, asset management and home services. NJR operates through four segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, and Storage and Transportation.
NJR has an expected revenue and earnings growth rate of 3.2% and 5.2%, respectively, for the current year (ending September 2023). The Zacks Consensus Estimate for current-year earnings has improved 3.1% over the last 30 days.
NextEra Energy Inc. NEE is expanding domestic clean energy assets through acquisitions and organic initiatives. NEE has stakes in natural gas pipelines in Texas and gains from an increase in natural gas production.
To enhance flexibility, NextEra Energy completed a few financing agreements to secure funds for acquisition. NEE benefits from declining installation costs and improving renewable technology. It has sufficient liquidity to meet obligations.
NextEra Energy has an expected revenue and earnings growth rate of 27.1% and 7.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 60 days.
Dr. Reddy's Laboratories Ltd. RDY has been witnessing healthy growth across its branded and global generics markets, especially in India and emerging markets. RDY’s new product launches have been driving its annual growth. Additionally, RDY strong generic portfolio gives it a strong position in the generic market, with ANDA and drug master filings, expected to significantly improve in the fourth quarter.
RDY is expected to outperform the industry in the upcoming quarters through strategic measures to combat pricing pressure in the United States generics industry and the presence of other players in the generic market. Our estimates for total revenues suggest a CAGR growth of 6.7% over the next three years.
Dr. Reddy's has an expected revenue and earnings growth rate of 6.6% and 5.2%, respectively, for the current year (ending March 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
Dr. Reddy's Laboratories Ltd (RDY) : Free Stock Analysis Report
Conagra Brands (CAG) : Free Stock Analysis Report
NewJersey Resources Corporation (NJR) : Free Stock Analysis Report
Coty (COTY) : Free Stock Analysis Report
