Fed Dampens Wall Street Sentiments: 5 Safe Stock Picks

OIn Sep 20, the Fed kept the benchmark lending rate unchanged at the existing 5.25-5.5% range at its September FOMC meeting. Market participants were widely expecting a status quo. However, the post-FOMC statement of Fed Chairman Jerome Powell destroyed the initial enthusiasm of investors.

Consequently, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — slid 0.2%, 0.9% and 1.5%, respectively. The small-cap benchmark — the Russell 2000 — also declined 0.9%.

More Interest Rate Hike Likely

Although the Fed paused rate hike in the September FOMC meeting, the current dot-plot has shown a strong likelihood of one more hike of 25 basis points in 2023. That will take the terminal interest rate of this hiking cycle to 5.6%, well above the 5.1% forecast in June. Notably, the current range of the Fed fund rate is the highest level since March 2001.

More importantly, the central bank said it would keep higher interest rates for a longer time period. The new projection has shown two rate cuts in 2024 instead of four projected in June. The Fed expects the U.S. economy to grow at a healthy 2.1% in 2023 and the core PCE price index — Fed’s favorite inflation gauge — to stay at 3.7% this year, well above its 2% target level. Strong GDP growth rate and stubborn inflation compel the central bank to continue restrictive monetary policies for a longer period.

Powell said, “We’re in a position to proceed carefully in determining the extent of additional policy firming.” However, he also said, “We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion.”

At this stage, it should be prudent to stay safe as volatile trading pattern that we are witnessing in the past one and a half months may continue in the fourth quarter of 2023.

Our Top Picks

We have narrowed our search to five stocks from defensive sectors like utilities, consumer staples and healthcare. These stocks have strong potential for the rest of 2023 and have seen positive earnings estimate revisions in the last 60 days.

Moreover, these companies are regular dividend payers which will act as an income stream during market’s downturn. Each of our picks carries a Zacks Rank #2 (Buy).

PepsiCo Inc. PEP reported robust second-quarter 2023 earnings. The results reflected strength and resilience in its diversified portfolio, modernized supply chain, improved digital capabilities, flexible go-to-market distribution systems and robust consumer demand trends. Resilience and strength in the global beverage and food businesses also aided results.

PEP expects organic revenue growth of 10% for 2023 compared with the 8% rise estimated earlier. PEP expects core earnings per share of $7.47 for 2023 compared with $7.27 forecast earlier.

PepsiCo has an expected revenue and earnings growth rate of 6.7% and 10.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days. PEP has a current dividend yield of 2.94%.

The Procter & Gamble Co. PG has benefitted from robust pricing and a favorable mix, along with strength across segments. PG’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. PG has witnessed continued strong momentum as reflected by the underlying strength in brands and appropriate strategies, which aided its organic sales growth.

Procter & Gamble remains focused on productivity and cost-saving plans to boost margins. PG’s continued investment in the business alongside its efforts to offset macro cost headwinds and balance top and bottom-line growth underscores its productivity efforts. PG is witnessing cost savings and efficiency improvements across all facets of the business.

Procter & Gamble has an expected earnings growth rate of 4.4% and 8.1%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days. PG has a current dividend yield of 2.45%.

HCA Healthcare Inc.’s HCA revenues remain on an upward trajectory on the back of a surge in admissions, outpatient surgeries and other procedures. Multiple buyouts aided HCA in increasing patient volumes, enabled network expansion, added hospitals to its portfolio and boosted business scale. HCA has been gaining from its telemedicine business line on the back of digitization of fueling demand. HCA resorts to prudent capital deployment via buybacks and dividends.

HCA Healthcare has an expected revenue and earnings growth rate of 6% and 9.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 30 days. HCA has a current dividend yield of 0.94%.

American Water Works Co. Inc. AWK is gaining from the implementation of new water systems and contributions from military contracts. Investments to upgrade its infrastructure will allow AWK to provide quality services to its expanding customer base. AWK continues to expand operations through organic and inorganic initiatives. Cost management is boosting margins. Our model projects an increase in revenues for the 2023-2025 period.

American Water Works Co. has an expected revenue and earnings growth rate of 8.2% and 6.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. AWK has a current dividend yield of 2.06%.

Vistra Corp. VST operates as an integrated retail electricity and power generation company. VST operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. VST is involved in electricity generation, wholesale energy purchases and sales, commodity risk management, fuel production, and fuel logistics management activities. VST retails electricity and natural gas to residential, commercial, and industrial customers across 20 states in the United States and the District of Columbia.

Vistra has an expected revenue and earnings growth rate of 46.2% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the last 30 days. VST has a current dividend yield of 2.49%.
Procter & Gamble Company (The) (PG): Free Stock Analysis Report

PepsiCo, Inc. (PEP): Free Stock Analysis Report

HCA Healthcare, Inc. (HCA): Free Stock Analysis Report

American Water Works Company, Inc. (AWK): Free Stock Analysis Report

Vistra Corp. (VST): Free Stock Analysis Report

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