Worries over sky-high inflation and the Federal Reserve’s aggressive plans to raise interest rates have been the primary drivers of market sentiment for most of the year.
As
such, all eyes will be on Friday’s key U.S. consumer price index report, which
arrives less than a week before the Fed’s highly anticipated June policy
meeting.
For
now, the market expects a half-point rate hike at
both the Fed’s June and July meetings. However, a hotter-than-expected CPI
print could trigger fresh bets toward a 75-basis-point move in July, and possibly
September.
The U.S. central bank has already
raised its Fed Funds target rate by 75 basis points so far this year.
Taking that into account, below, we
highlight three companies that are leaders in their respective fields that are
set to outperform in the months ahead as the Fed tightens monetary policy to
combat soaring inflation.
1. Palo Alto Networks
Year-To-Date Performance: -5.3%
Market Cap: $52.5
Billion
Palo Alto Networks (NASDAQ: PANW) is
widely considered one of the leading names in the cybersecurity software
industry. The company serves over 70,000 organizations in 150 countries,
including 85 of the Fortune 100.
Its core products are a platform that
includes advanced firewalls and intrusion prevention systems that offer network
security, cloud security, endpoint protection, and various cloud-delivered
security services.
In our view, shares of the Santa
Clara, California-based tech company are well positioned to resume their march
higher in the months ahead, considering the ongoing surge in cybersecurity
spending amid the current geopolitical environment.
Shares of PANW, which are down 5.3%
year-to-date, closed Tuesday’s session at $527.00, roughly 18% below its record
peak of $640.90 touched on Apr. 20. At current valuations, the global
cybersecurity leader has a market cap of $52.5 billion.
In
a sign of how well its business has performed amid the existing geopolitical
backdrop, Palo Alto Networks reported profit and sales which crushed expectations for its
fiscal third quarter on May 19, thanks to ballooning demand for its security
software.
The
earnings beat was fueled by a strong increase in total billings, a key sales
growth metric, which surged 40% from a year earlier to $1.8 billion.
The
cyber specialist also provided an upbeat outlook, lifting its full-year
guidance for revenue, billings, and earnings per share due to favorable
cybersecurity demand trends.
Not
surprisingly, in an Investing.com survey of 36 analysts, 33 rated PANW
stock as a ‘buy,’ three rated it as ‘neutral,’ and none considered it a ‘sell.’
Among
those surveyed, the stock had a roughly 20.5% upside potential with an average
12-month price target of $635.35, as it looks to be one of the main
beneficiaries of the continuing growth in cybersecurity spending.
2. Phillips
66
Year-To-Date Performance: +51.7%
Market Cap: $52.8
Billion
One of the leading energy
manufacturing and logistics companies in the U.S., Phillips 66 (NYSE: PSX), debuted
as an independent company when ConocoPhillips (NYSE: COP)
executed a spin-off of its downstream and midstream assets in 2012.
Its core business operations involve
processing, refining, transporting, delivering, storing, and marketing crude
oil, natural gas, natural gas liquids, and refined petroleum products, such as
gasolines, distillates, and renewable fuels.
PSX is up around 52% in 2022, ending
Tuesday's session at $109.92—its highest level since January 2020. At current
valuations, the thriving Houston, Texas-based energy firm has a market cap of
$52.1 billion.
With
robust year-to-date returns, Phillips 66
remains one of the best names to own as the Fed raises rates, considering its
latest efforts to return more cash to shareholders in the form of stock
buybacks and higher dividend payouts.
The
oil refiner recently announced plans to restart share repurchases after
suspending the program in March 2020 due to the coronavirus pandemic.
It
also raised its quarterly dividend by 5% to $0.97 per share. This represents an
annualized dividend of $3.88 and a yield of 3.53%, making it an extremely
attractive play under current conditions.
In
addition, Phillip 66’s stock has a comparatively low price-to-earnings (P/E)
ratio of 18.4, making it cheaper than other notable names in the oil & gas
refining space, such as Marathon Petroleum (NYSE: MPC), and Valero
Energy (NYSE: VLO).
The
diversified energy company is auspiciously placed to reap the benefits of
improving energy market fundamentals, soaring global fuel demand, and strong
oil and gas prices, which will help drive future profit and sales growth and
allow it to maintain its focus on shareholder returns.
According
to a number of valuation models, including P/E or P/S multiples or terminal
values, the average fair value for PSX stock on InvestingPro+ stands at $126.30, a potential 14.9%
upside from the current market value.
3. Bank of
America
Year-To-Date Performance: -18.3%
Market Cap: $292.7
Billion
Bank of America (NYSE: BAC) is one
of the country’s ‘Big Four’ banking institutions, along with JPMorgan Chase
(NYSE: JPM), Wells
Fargo (NYSE: WFC), and
Citigroup (NYSE: C).
The Charlotte, North Carolina-based
company, whose primary financial services include commercial banking, wealth
management, and investment banking, serves approximately 11% of all American
bank deposits.
BAC closed at $36.35, with the stock
being down about 18% year-to-date. At current levels, BofA has a market cap of
around $293 billion, making it the second-biggest U.S. banking institution,
behind JPM.
Despite
growing fears that the Fed’s aggressive monetary tightening could potentially
tip the economy into a recession, Bank of America stands to benefit from the
ongoing uptick in rates across the Treasury market resulting from the current
inflationary environment.
Banks
are among those most sensitive to rising interest rates as higher yields tend
to boost the return on interest that lenders earn from their loan products, or
net interest margin.
In
fact, BAC noted in its first quarter earnings report that
a 100-basis-point increase in interest rates would boost its net interest
income by $5.4 billion over the next 12 months.
Additionally,
the banking giant—whose stock has a relatively cheap P/E ratio of 10.3—offers
an annualized dividend of $0.84 per share at a yield of 2.31%, above the
implied yield for the S&P 500, which is currently at 1.41%.
Indeed, 15 out of 28 analysts surveyed by Investing.com
rate Bank of America’s stock as “outperform,” while the remaining 13 considered
it as a ‘hold.’
The
average BAC stock analyst price target is around $47.00, representing an upside
of approximately 30% from current levels over the next 12 months.
Similarly, the quantitative models in InvestingPro+ point to
a gain of roughly 24% in BAC stock from current levels over the next 12
months, bringing shares closer to their fair value of $45.09.
Source: investing.com