If the Federal Reserve manages a soft economic landing, these seven stocks will win.
JPMorgan Chase (JPM): You can’t have a bull market without the nation’s leading bank.
KB Home (KBH): Homebuilders are priced as if we’re in 2008 again. We’re not, and KB Home at 4x earnings is a steal.
Visa (V): Will keep picking up steam as global travel and spending continues to rebound.
Polaris (PII): Cyclical consumer product makers like Polaris will benefit from strong spending patterns in 2022.
Ford (F): Valuations for the automakers are too low, and are already pricing in a significant recession.
Airbnb (ABNB): The company just reported massive earnings but sold off anyway.
Zoom Video (ZM): At least a few of the formerly high-flying software stocks will bounce back. Zoom is a good candidate.
Source: Zeedign.com / Shutterstock
The Federal Reserve is facing a tall order. It needs to get runaway inflation under control without bringing the economy grinding to a halt. Fed chair Jerome Powell made a major step toward trying to achieve these goals on Wednesday, when he announced the Fed’s 50 basis points interest rate hike. In his press conference, Powell said that the Fed is working “expeditiously” to bring inflation under control.
For a moment, it seemed that Powell had struck just the right tone with these comments. The S&P 500 leapt 3% on Wednesday, marking one of its best days of the past year. After a month of relentlessly sinking stock prices, there was hope. But then, the market immediately gave back those gains Thursday and Friday. Still, while the market remains uncertain, the recent price action around the Fed decision shows that the market is ready to make a serious upward move if and when the Fed can get inflation to a more manageable place.
In other words, if the Fed can really make the adjustments necessary to get inflation in check, the stock market could be set for a major rally. For investors with confidence that the economy still has better days ahead of it, these seven stocks should lead the way in the months ahead.
JPMorgan Chase (JPM)
You can’t have a healthy economy and stock market without a solid financial system. Bank credit is the oxygen that keeps the economic fire alive. And JPMorgan (NYSE:JPM), as one of the country’s largest and best-run investment and commercial banks, is a key barometer of overall economic health.
With JPM stock down nearly 25% year-to-date, it’s clear that investors are not liking what they’re seeing at the moment. However, the bank’s actual results have been strong. JPMorgan’s Q1 results were laudable in most regards. Yes, the headline earnings number 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 to the upside and the bulls take charge again, JPM stock at 11x earnings and a 3.3% dividend yield is quite the offer. Shares are now down close to 10% since the beginning of 2020. It’s hard to believe that JPM stock is worth less now than it was prior to the onset of Covid-19, but that’s where things stand today. Once the current bout of pessimism lifts, JPM stock should enjoy a swift rebound.
KB Home (KBH)
One of the major turning points for the market last week came during Powell’s Q&A session. In it, a journalist asked Powell if the Fed would be open to an aggressive 75 basis point rate hike in future meetings. Powell unequivocally shot that idea down, saying the Fed’s future rate hikes would be more measured.
This was the best news possible for the housing market, and homebuilders like KB Home (NYSE:KBH) in particular. Investors seemed to have this sinking sense of dread that the Fed was going to raise rates so aggressively as to send the economy straight into a recession. However, the Fed seems willing to chart a moderate path ahead.
After dropping by a third over the past year, KBH stock is now — get this — trading at less than 4x forward earnings. Analysts project more than $10 per share of earnings for KB Home this year, yet the stock is selling for just $33 per share. It seems investors are reliving their nightmares from 2008 when the housing market collapsed. However, the market is structurally far healthier today than in that crisis. People will look back at sub-4x price-to-earnings ratios in 2022 for homebuilders with shock. Unless the economy rolls over tomorrow, KBH stock is way too cheap.
Visa (NYSE:V) is, more or less, a small tax on global commerce. Visa takes a fractional piece of millions of transactions every day in almost every country on earth. As economic activity picks up globally, Visa profits. It’s particularly tied to international travel, as it gets to charge much higher transaction fees on purchases made in a foreign currency.
The limits to international travel 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 advance. Visa reported strong quarterly earnings in Q1 of this year; that was a welcome surprise as many large-cap companies have been putting up disappointing numbers as of late. V stock should work its way back toward 52-week highs once the market downturn lets up.
Polaris (NYSE:PII) is a leading maker of snowmobiles and all-terrain vehicles (ATVs). This is a fairly cyclical business. Demand for these sorts of vehicles is highly dependent on economic conditions and also — for snowmobiles — the amount of snowfall in a given winter.
These sorts of cyclical stocks can make for great investment opportunities during a bull market. Not surprisingly, PII stock has slumped lately as traders rush to get out of the way of a potential recession.
The fact is, however, that PII stock is already back down to pre-Covid levels. Meanwhile, the business is less cyclical than people might fear. It has grown revenues every year sequentially dating back to 2017. Meanwhile, sales only increased 17% in 2021, this isn’t a business that experienced a sudden windfall due to pandemic-related buying patterns. PII stock is at just 10 times forward earnings and should be set for a sharp rally as consumer spending remains robust this coming year.
The automakers have become true battleground stocks. For one, there’s the always lurking threat of Tesla (NASDAQ:TSLA) and other electric vehicle (EV) makers in terms of disrupting the existing order. For another, the global semiconductor shortage has made life exceptionally difficult for the major manufacturers such as Ford (NYSE:F).
It’s a glass half full situation, however. The supply chain shortages have hurt as badly as they have precisely because demand is so high. If Ford can get the parts it needs, it should be able to produce record profits in the current economic environment. And if the Fed is able to manage a soft landing, pent-up consumer demand should keep car sales elevated for the next few years. With F stock down 35% year-to-date, shares are now going for less than 8 times earnings. That’s a bargain if you’re bullish on the economy.
Airbnb (NASDAQ:ABNB) shows the dangers of being viewed as a tech stock in the current environment. At its core, Airbnb is a leisure and hospitality company and is heavily driven by macroeconomic factors such as demand for international travel, airfare prices, levels of Covid-19 restrictions and the like.
And yet, because Airbnb uses a technology platform to offer its services, it ends up trading as though it were just another software-as-a-service (SaaS) company. Lately, that’s nothing but bad news for a stock’s prospects.
To put numbers on that, Airbnb just announced an incredible quarter with 70% revenue growth and 59% nights and experiences booked growth. A decent chunk of that is due to reopening from the pandemic, to be sure. However, Airbnb has already surpassed pre-Covid levels of activity in terms of both user numbers and profitability. In a better market for tech stocks, ABNB shares would be surging right now. Instead, they’re down more than 15% after their latest earnings call. That’s a mispricing, and an opportunity for growth investors today.
Zoom Video (ZM)
Finally, it’s worth rounding out the list with a pure growth stock. If the bull market is still alive and well, some of these beaten-down software companies will stage tremendous recoveries. Zoom (NASDAQ:ZM) seems like one of the survivors in this current growth shakeout.
For one thing, Zoom is highly profitable. ZM stock is trading at 27 times forward earnings. Yes, that’s earnings, not revenues or EBITDA or other such metrics. On an earnings basis, Zoom is now selling at the same valuation ratio as Coca-Cola (NYSE:KO).
Now sure, Coke is a more stable business long-term. However, there isn’t much growth in soft drinks anymore. By contrast, analysts still see Zoom being able to grow revenues 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 is able to manage its transition from a stay-at-home superstar to a more stable large tech enterprise. ZM stock has been absolutely pummeled over the past year as top-line growth slowed. But it has a large user base and strong profitability metrics to shelter it from the current market storm.
On the date of publication, Ian Bezek held a long position in PII and V stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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