Is the rate hike boogeyman gone? The market certainly thinks so. After Federal Reserve Chairman Jerome Powell delivered a shockingly dovish speech at The Economic Club of New York on Wednesday afternoon, markets took off like a rocket ship. Investors sifted through the newly christened stocks to buy on the premise that the Fed’s rate hike trajectory will actually be much more gradual than investors had previously anticipated.
All major indices rallied in a big way. These rallies follow what was also a decent rally on Tuesday and big rally on Monday. In other words, since the Black Friday sell-off, the S&P 500 is up over 3%.
Is the market sell-off over? Is this the time to buy the dip?
I think so. A hawkish Fed that seemed determined to hike rates no matter what was one of the biggest risks to this market. Now, that risk is all but gone. Previously, Powell had been saying we were a long ways from neutral, implying several more rate hikes were in the pipeline. Now, he’s saying that we are just below neutral, and that is why the market is pricing in just two more rate hikes over the next twelve-plus months.
Meanwhile, stocks are broadly still in correction territory, with many market favorites still in bear market territory. As such, stocks have healthy runway into the end of the year as rising rate fears ease. Which stocks should you buy? Let’s take a look at ten stocks to buy as the aggressive rate hike threat moves into the rear-view window.
Percent Off All-Time High: 45%
Why It Has Been Killed: Chipmaker Nvidia (NASDAQ:NVDA) has lost more than 40% of its value over the past two months because of concerns regarding the supply-demand fundamentals underlying Nvidia’s core GPU market. Namely, cryptocurrency mining demand has gone from huge to next to nothing, and that is creating GPU inventory problems for Nvidia. Those inventory problems will take a few quarters to clear, during which time its revenues and margins will be adversely affected. NVDA stock wasn’t cheap to start out with, so a multi-quarter slowdown is the sort of catalyst that causes a big wipe-out.
Why It Will Bounce Back: The growth narrative at Nvidia was never really about cryptos. At their peak, crypto mining accounted for under 10% of revenues. The big drivers here are cloud and data, and Nvidia’s businesses with exposure to those markets are firing on all cylinders. Thus, once near-term inventory headaches pass, Nvidia will get back to big revenue growth and big margin expansion, the likes of which will power NVDA stock higher.
Percent Off All-Time High: 20%
Why It Has Been Killed: Retail giant Target (NYSE:TGT) has dropped in a big way over the past week due to uninspiring third-quarter numbers which showed that growth is slowing against a rising interest rate backdrop. The implication was that rising rates are starting to dilute what was red-hot consumer confidence, and that more rate hikes going forward would further weaken the consumer. Such weakness would ultimately cause Target’s growth trajectory to deteriorate, and that’s why investors dumped TGT stock.
Why It Will Bounce Back: With Powell sounding a dovish tone and the market expecting only two rate hikes over the next year, Target’s biggest risk is in the rear-view mirror. Meanwhile, this is a company which is still operating at decade-high levels with decade-best comparable sales and traffic growth. The digital business is also hot, growing at a near-50% rate amid what has started out as a big holiday shopping season on the digital front.
Overall, the growth drivers here remain positive, while the risk profile has been significantly reduced. That combination implies a healthy recovery rally into the end of the year.
Percent Off All-Time High: 19%
Why It Has Been Killed: E-commerce and cloud behemoth Amazon (NASDAQ:AMZN) has seen its shares fall into bear market territory over the past two months because of valuation and slowing growth concerns. Namely, Amazon is notoriously one of the most richly valued stocks and derives a significant portion of its value from down-the-road profits. The higher rates go, the lower the present value of those down-the-road profits. Also, Amazon’s e-retail business has been noticeably slowing ahead of the holiday season.
Why It Will Bounce Back: Amazon stock will bounce back as the Fed’s rate hike agenda becomes more dovish for two big reasons. One, fewer rate hikes means less pressure on the valuation, so the present value of Amazon’s down-the-road profits won’t be diluted as much as feared. And two, fewer rate hikes also means less of a hit on the consumer, who Amazon has a ton of exposure to through its dominant e-commerce business. As such, multiple expansion and a rebound in the e-commerce business should power a rebound in AMZN stock.
Percent Off All-Time High: 38%
Why It Has Been Killed: Digital advertising giant Facebook (NASDAQ:FB) has struggled over the past several months for a plethora of reasons. The Cambridge Analytica scandal, which broke in early 2018, has opened a can of worms which could lead to tighter regulation and bigger taxes for Facebook. Meanwhile, revenue growth is slowing due to ad saturation on the Facebook platform and a broader slowdown across the whole digital ad industry. Concurrent to this slowdown, margins are dropping due to higher security spend, so profit growth is presently scant.
Why It Will Bounce Back: Facebook stock will bounce back mostly because it’s dirt cheap and the growth prospects remain healthy. This is still a big-growth company with 30%-plus revenue growth. Meanwhile, while margins are dropping, they are still very healthy at over 40% last quarter. The company’s platforms (Facebook, Instagram, Messenger and WhatsApp) remain very relevant, engagement remains high and the digital ad transition remains strong.
Yet, the stock trades at less 20X forward earnings — a dirt-cheap multiple for this quality of growth. All it will take is a sentiment reversal to shoot FB stock way higher, and you could get that sentiment reversal here with rate hike fears easing.
The Trade Desk (TTD)
Percent Off All-Time High: 14%
Why It Has Been Killed: Programmatic advertising leader The Trade Desk (NASDAQ:TTD) has dropped recently due to no fault of its own. This company’s most recent earnings report was nothing short of stellar. But investors looked past that and instead sold TTD stock with the rest of the tech sector. The big drag? Higher interest rates dragging down present-day equity valuations for companies who derived most of their value from down-the-road profits, as with AMZN.
Why It Will Bounce Back: TTD stock will bounce back because there was nothing holding this company back besides valuation, which was adversely affected by the prospect of multiple rate hikes in the pipeline. With only two rate hikes projected for the next 12 months, valuation isn’t that big of a headwind anymore, and TTD stock (which is coming off a record quarter and has powerful secular growth drivers) will rebound strongly and become one of the stocks to buy.
Percent Off All-Time High: 11%
Why It Has Been Killed: Retail giant Walmart (NYSE:WMT) has dropped into correction territory over the past several weeks due to concerns regarding the U.S. economy. Namely, investors were concerned that continued rate hikes would further weaken an already slowing U.S. consumer, and that such further weakening would ultimately eat into Walmart’s growth and profits.
Why It Will Bounce Back: Now that such rate hike fears are largely unsubstantiated, the recent plunge in WMT stock also seems unsubstantiated. This is a company that, much like Target and other retailers, is presently operating at decade-high levels with robust average ticket, traffic, and digital sales growth.
Considering that rates likely aren’t heading that much higher any time soon, the consumer won’t get that much weaker any time soon, and Walmart should continue to operate at these high levels.
Percent Off All-Time High: 35%
Why It Has Been Killed: Streaming leader Netflix (NASDAQ:NFLX) has dropped well into bear market territory over the past two months because the threat of higher rates has provided a double headwind to the stock. On one end, Netflix is one of the more richly valued glamour stocks in the market, and that big valuation has been pressured by rising rates. On the other end, Netflix has recently come into a lot of debt, and higher rates increase the carrying cost of all that debt.
Why It Will Bounce Back: Netflix stock has dropped almost exclusively due to the threat of rising rates. Everywhere else you look, this company is firing on all cylinders, with subscriber growth back at all time highs, revenue growth consistently trending along at 30%-plus rates, and margins marching steadily higher. Thus, with rate hike fears now largely in the rear-view mirror, Netflix stock has plenty of fundamentally supported firepower to push it back into the stocks to buy column.
TJX Companies (TJX)
Percent Off All-Time High: 17%
Why It Has Been Killed: Discount retailer TJX Companies (NYSE:TJX) has dropped into correction territory over the past several weeks because of a mixed third-quarter report which included a weak profit guide. That weak guidance was a result of higher freight and labor expenses, both of which are a reflection of a rising inflation, rising rate economy.
Why It Will Bounce Back: TJX stock will bounce back from this correction because the stock is cheap and the fundamentals are improving. Per Google Trends, it looks like TJ Maxx had a really good Black Friday Cyber Monday weekend, and that is doubly impressive because TJ Maxx doesn’t even run Black Friday sales.
As such, robust holiday sales at healthy margins are converging on a fairly beaten up stock, and that convergence should ultimately push TJX stock higher into the end of the year.
Alphabet (GOOG, GOOGL)
Percent Off All-Time High: 15%
Why It Has Been Killed: The headwinds for Facebook have been the same ones weighing on Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). You have slowing revenue growth from broader saturation across the entire digital ad landscape. You have bigger-than-ever regulation concerns, which could ultimately hinder growth and cut into margins. And you have falling margins, which at Alphabet are the fault of a continued shift to lower-engagement mobile ads.
Why It Will Bounce Back: Alphabet stock will ultimately bounce back because what you have now is a pretty cheap stock and a company that is still the backbone of the internet everywhere in the world besides China. Not to mention, Alphabet is also a leader in cloud and AI, two markets oozing with long-term growth potential. Ultimately, that means near-term weakness is nothing more than a long-term opportunity. But, you need a sentiment reversal to spark a rebound, and that sentiment reversal could unfold over the next several weeks as markets grow less concerned about “too many” rate hikes. And that could put GOOGL among the best stocks to buy.
Percent Off All-Time High: 30%
Why It Has Been Killed: Payments processor Square (NYSE:SQ) has dropped well into bear market territory over the past two months because higher rates have threatened the near to medium term outlook for the stock on multiple fronts. First, SQ is a hyper-growth, big-valuation stock whose present value gets diluted when rates go up. Second, SQ has a ton of consumer exposure, and the consumer tends to get weaker as rates go up. Third, SQ has a growing loans business which is subject to black box risks as rates rise.
Why It Will Bounce Back: In the big picture, SQ’s long-term growth fundamentals are quite strong. This is a company enabling a new era of cashless transactions, has an early leadership position, and still has yet to really expand internationally or into the e-commerce space.
As such, with the rate problem now significantly reduced, SQ stock looks ready to rally on improving near to medium term fundamentals, making it among the better stocks to buy.
As of this writing, Luke Lango was long NVDA, TGT, AMZN, FB, TTD, WMT, NFLX, TJX, GOOG, and SQ.