An active investor’s portfolio is significantly dynamic. For every major event, there are stocks to buy, sell or avoid. One such portfolio-shaping event is around the corner: The Federal Reserve is expected to taper in response to inflation.
The timing of the rate hike is still uncertain. However, there seems to be clarity on the point that the Federal Reserve will begin tapering around December. Federal Reserve Chair Jerome Powell has already said that it could start to reduce its monthly bond purchases in 2021.
The good part is that the Fed is communicating some indications of its plans. This is likely to ease the nerves of market participants.
However, by nature, asset markets are sensitive to news. Even if there is no meaningful correction, some volatility is likely to occur when the Fed begins tapering.
Therefore, it makes sense to adjust your portfolio. In my view, this is a good time to book profits in stocks that have witnessed a significant run-up in the last few quarters. At the same time, investors could benefit from exposure to low-beta stocks, or stocks that trade at attractive valuations.
With that in mind, investors should consider these seven stocks to buy ahead of a likely Fed tapering in December:
- Walmart (NYSE:WMT)
- JPMorgan Chase (NYSE:JPM)
- Pfizer (NYSE:PFE)
- Northrop Grumman (NYSE:NOC)
- Chevron (NYSE:CVX)
- AT&T (NYSE:T)
- Newmont Corporation (NYSE:NEM)
Stocks to Buy: Walmart (WMT)
WMT stock has traded sideways in 2021. With a low beta, some exposure to Walmart shares can be considered before a potential Fed tapering.
It’s also worth noting that the consumption sector is a key growth driver for the U.S. economy. With retail spending being a key part of consumption expenditures, Walmart stock is attractive.
Additionally, the approaching holiday season can accelerate sales for the fourth quarter in 2021 as well as Q1 2022.
Deutsche Bank recently pointed out that Walmart’s membership program is gaining momentum. The subscription service, which was launched one year ago, now has 32 million U.S. members. Deutsche Bank further believes subscription growth is at an “inflection point.” As subscribers swell, it will further boost the company’s cash flows.
It’s also worth noting that for Q2 2022, the company reported 5.2% comparable sales growth. Additionally, its e-commerce growth has remained strong. Walmart is creating omnichannel presence coupled with inroads in the grocery segment.
WMT stock also has a current dividend yield of 1.52%. If comparable store sales growth remains robust, a dividend increase can be expected.
JPMorgan Chase (JPM)
Over a 12-month period, JPM stock is higher by 61%. However, the stock has remained sideways for the last six months. At a forward price-to-earnings (P/E) ratio of 13.09x, the stock might be poised for another breakout after the current consolidation.
Another important point to note is that a possible tapering and a rate hike in 2022 is likely to be positive for the financial sector. Throughout the pandemic, non-core banking services have been a key earnings driver.
For Q2 2021, the bank reported non-interest revenue of $18.5 billion and net-interest income of $12.9 billion. However, with the visibility of a rate hike, the core banking segment is likely to witness improved performance.
Once net-interest income margin starts trending higher, banking stocks are likely to witness a meaningful rally. At the same time, investment banking and wealth management revenue will probably remain steady.
JPM stock is also a quality dividend stock for the portfolio. It currently offers an annualized dividend of $3.60, which translates into a healthy dividend yield of 2.3%.
Overall, JPMorgan is well-positioned from a fundamental perspective. If economic activity remains steady along with a rate hike done in baby-steps, JPM stock has ample upside headroom.
Stocks to Buy: Pfizer (PFE)
PFE stock is also attractive with its low volatility and robust dividend yield of 3.5%. At a forward P/E ratio of 12.12x, the stock seems positioned for further upside in the coming quarters.
For the current year, Pfizer expects revenue of $33.5 billion from the Covid-19 vaccine. The company expects to ramp up manufacturing and should be able to produce three billion doses of the vaccine by the end of 2021. As a third dose of the vaccine is being recommended for at-risk groups, the outlook for Pfizer is bright for 2022.
At the same time, the company has been delivering healthy growth excluding the Covid-19 vaccine. Through 2025, Pfizer expects revenue to increase at a compound annual growth rate (CAGR) of 6%. This seems entirely likely considering the company’s deep pipeline of candidates. Currently, it has 40 products in Phase two and 23 products in Phase three.
Last month, Pfizer also announced the acquisition of Trillium Therapeutics for a consideration of $2.26 billion. The acquisition will diversify the company’s oncology pipeline. With Pfizer likely to generate healthy cash flows from sales of its Covid-19 vaccine, there is ample financial headroom to pursue inorganic growth.
Overall, PFE stock is trading at attractive levels and a strong breakout on the upside is due.
Northrop Grumman (NOC)
NOC stock is another low-beta name that’s trading at an attractive forward P/E of 13.7x. Additionally, the stock offers an annualized dividend of $6.28.
The downside risk seems limited for the stock at current levels. Global defense spending also keeps trending higher, giving Northrop Grumman shares upside potential.
As of Q2 2021, Northrop reported an order backlog of $76.6 billion. For the current year, the company has a sales guidance of about $36 billion. Therefore, the order backlog provides two years of revenue and cash flow visibility.
It’s also worth noting that for the first six months of 2021, the company’s space systems reported revenue growth of 32% to $5.3 billion. Mission systems sales increased at a healthy 8% for the same period. These segments are likely to be Northrop Grumman’s key revenue and cash flow drivers.
Further, for the first half of 2021, the company reported transaction-adjusted free cash flow (FCF) of $1 billion. This implies an annualized FCF of $2 billion. Therefore, dividends are sustainable. As a matter of fact, the company increased dividends by 8% in the last quarter. Overall, NOC stock is one of the the top stocks to buy as the Fed tapering looms.
Stocks to Buy: Chevron (CVX)
Data from the Federal Reserve Bank of Dallas indicates that the actual gross domestic product (GDP) is quickly approaching the potential GDP. With a recessionary gap, the economy still has potential for accelerated growth.
I am therefore bullish on oil, and CVX stock looks appealing after an extended period of consolidation. A key reason to like the stock is the annualized dividend of $5.36, which translates into a yield of 5.54%.
Chevron’s assets have a low breakeven point. Therefore, even at oil prices of $60 per barrel, the company is positioned to deliver healthy cash flows. Further, Chevron has a strong balance sheet with a net-debt ratio of 21%.
It’s worth noting that the company’s reserve-to-replacement ratio has averaged 99% over the last five years. With a healthy financial profile, Chevron is positioned to maintain production and boost reserves. The company already has a diverse portfolio of unexplored assets.
High financial flexibility will also allow Chevron to invest in the renewable energy sector over the next few years. The company plans to significantly ramp up volumes in renewable natural gas and biodiesel.
CVX stock has a relatively high beta of 1.3. However, at a forward P/E of 14.39x, the stock seems to have a low downside risk.
T stock has significantly underperformed in the last year. At a forward P/E of 8.47x, the stock looks attractive with minimal downside risk. On the other hand, value could be unlocked with the upcoming split from its media division.
It’s true that AT&T disappointed income investors with the announcement that dividends will be cut by half after Warner Media splits off. However, I expect the dividend cut factor will be largely offset by value creation from a leaner organization.
An important point to note is that AT&T has invested extensively in the mobility segment in the last five years. This is already showing results with healthy subscriber addition in the post-paid and fiber segment.
Even HBO Max and HBO subscribers have increased at a healthy pace. AT&T has guided for 70 to 73 million global subscribers by the end of 2021. Once the merger with Discovery is completed, the combined entity will be one of the biggest spenders in content creation.
Therefore, there are ample upside catalysts for T stock. Further, with some volatility expected in the broad markets, this low-beta stock looks appealing.
Stocks to Buy: Newmont Corporation (NEM)
It might come as a surprise that I am talking about a gold miner before a Fed tapering. But I believe there are a few important factors that make Newmont a worthwhile buy.
First, NEM stock has a low beta and a dividend yield of 3.98%, which is sustainable. Further, the stock trades at an attractive forward P/E of 17.73x.
It’s also worth noting that the Fed tapering is likely discounted in gold prices. Even after the first rate hike in 2022, real interest rates will remain negative. This is positive for gold and other precious metals.
From a business perspective, Newmont Mining has a quality asset base. The company is positioned for steady gold production over the next decade. At the same time, Newmont expects a gradual decline in all-in sustaining costs in the next few years.
Therefore, the gold miner is worth holding for the long-term. The company also has a strong balance sheet and is positioned for free cash flow in excess of $2 billion for the year.
The stock is underperforming and therefore presents a good opportunity for investors to consider fresh exposure. Even if the stock is sideways, healthy dividends make NEM stock worth adding to a portfolio.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.