Investors have had a rather incredible start to the year. Inflation has surged to 7.5%, the highest level we’ve seen in four decades. Bond yields have surged, as investors anticipate rate hikes could come more aggressively than expected. Some recent commentary from the Federal Reserve’s James Bullard supporting a half-point hike in March has caused even more concern among investors. Thus, many are seeking the best stocks to buy as the market reacts to the news.
That’s because rising interest rates aren’t good for equity valuations. As bond yields rise and the Fed hikes the overnight rate, the discount rate investors use to discount future cash flows of companies increases. This means businesses have to earn more to beat inflation, while investors more aggressively discount future cash flows.
For companies that are not yet profitable, but expect to be in a few years, this is even more damaging. That’s because the compounding effect of interest rates means that future earnings become much less valuable today. Accordingly, investors don’t want to touch various high-growth stocks if they can’t show the ability to earn real cash flows in a reasonable amount of time.
That’s not to say there aren’t any great growth stocks to own. Quite the contrary, actually. I think there are a number of great long-term stocks to consider buying on this interest rate-induced dip.
Here are seven of the best stocks to buy that come to mind when looking at the growth sector right now:
- Apple (NASDAQ:AAPL)
- Nvidia (NASDAQ:NVDA)
- Ford Motor Company (NYSE:F)
- Realty Income (NYSE:O)
- Federal Realty Investment Trust (NYSE:FRT)
- Nucor Corporation (NYSE:NUE)
- Builders FirstSource (NYSE:BLDR)
Best Stocks to Buy: Apple (AAPL)
Investors really can’t go wrong owning Apple. This long-term growth investor’s dream stock continues to chug along like nothing’s happening in the markets. In fact, just a month into 2022, this technology giant has hit yet another milestone. Not only did Apple become the world’s first three trillion-dollar company, but it also witnessed a record-breaking quarter.
As a growth and dividend stock, AAPL is a top choice for beating inflation while making profits. This company offers a small dividend yield of 0.5%, and over the last five years, the stock has witnessed annual growth of 9.1%.
After releasing its blockbuster quarter report, AAPL stock rose 8.2% and is currently trading around the $170 level. In the first quarter of 2022, Apple brought in revenue of $123.95 billion, which is an 11% year-over-year (YOY) gain and an all-time high. The company grew its earnings per share (EPS) 25% YOY to $2.10.
As Apple continues to roll out new products and raise prices for its offerings, it shouldn’t be hit as hard by inflation as other companies. Those looking for a market leader with strong pricing power have reason to buy Apple and forget about the rest.
After rising more than 70% over the past year, Nvidia was called one of the best semiconductor stocks by Bank of America. Even though NVDA stock is currently taking a hit from this inflationary environment, this is a company worth considering as a long-term hold.
The recent drop has cut approximately one-quarter of the company’s market valuation off the top. That said, unlike many other high-growth stocks, Nvidia is profitable and growing its bottom line impressively.
The company’s third-quarter report highlighted revenue growth of 50% on a YOY basis. Additionally, earnings per share came in at $1.17, marking 60% YOY growth. In other words, Nvdia is growing its bottom line faster than its top line. This company is becoming a more stable cash flow producer, and is one that could easily grow into its valuation of approximately 70 times earnings in short order.
Investors looking at metaverse-related stocks may like Nvidia’s positioning. This high-end producers of chips targets high-growth sectors such as the metaverse providing excellent long-term upside. Those looking for a cash-flow-producing growth machine may want to look at NVDA stock right now.
Best Stocks to Buy: Ford Motor Company (F)
After witnessing a massive surge in 2021, Ford became the best-performing automobile stock last year. Ford saw its valuation grow 136% as investors continue to price in bullish growth prospects. Indeed, the company’s competition has been underperforming Ford for some time, likely due to interest around this auto manufacturer’s shift toward electric vehicles.
Now, 2022 is turning out to be a difficult year for all auto manufacturers. Rising inflation, lower expectations for growth and chip shortages still plague this sector. Ford is not immune, and the company’s stock price is down substantially.
That said, Ford’s ultimate value comes from its brand name and its ability to leverage its brand among American consumers. The company’s recently-launched Ford F-150 Lightning has enticed many investors to consider this stock.
As far as cash flow stability goes, Ford is certainly an interesting stock pick for those looking to beat inflation in the years to come.
Realty Income (O)
Real estate investment trusts (REITs) are intriguing investments because of the structure of these stocks. Created as a trust, REITs deliver a mandated (very high) level of dividend income to investors. Accordingly, those looking to buy an income-generating investment often choose REITs for their higher-than-average yields.
Now, the real estate sector is one that’s likely to be negatively impacted by rising rates. As rates rise, so too do mortgages. However, the value in owning a company like Realty Income is the valuation of the company’s underlying portfolio doesn’t really matter as much as its cash flow prospects.
Barring some sort of serious recession, Realty Income is poised to pump out cash to shareholders. Those looking for stability in the real estate space may want to consider a large, diversified REIT like O stock.
This company’s 4.4% dividend yield and its long-term, locked-in contracts make Realty Income one of the go-to options for investors in the real estate space.
Best Stocks to Buy: Federal Realty Investment Trust (FRT)
Another top REIT to look at that’s similar to Realty Income is Federal Realty Investment Trust. This REIT owns a high-quality portfolio of retail properties such as shopping centers in the U.S.
This is a smaller-cap option relative to Realty Income. And this trust yields only 3.6%. However, this REIT has the longest annual dividend growth streak in this sector at 54 years.
Dividend growth is a big deal when thinking about inflation. As inflation rises, companies that fail to increase their dividends can provide negative real returns to investors. One of the reasons for FRT stock’s relatively low yield is the company’s ability to raise its yield aggressively over time.
Should the real estate sector get hit harder by rising interest rates, yields on FRT should rise. At some point, investors will swoop in and begin buying shares, knowing that locking in those higher yields on this REIT will produce even higher yields down the road.
Accordingly, this is a stock I view as one with some implicit floor underneath its shares. Those seeking stability with their long-term income would do well considering FRT stock on any future dips.
Nucor Corporation (NUE)
In 2021, the stock of this largest steel producer in the United States increased by a whopping 118.4%. Nucor was also called one of last year’s best-performing stocks. Fortunately, this upward momentum and profitable operating environment have continued so far in 2022.
Due to its favorable performance in January and impressive quarterly results, analysts are bullish about NUE’s future. According to its recent Q4 results, Nucor recorded earnings of $7.97 per share. It also saw a 97% YOY hike in its revenue, reaching $10.36 billion.
Indeed, the steel industry is cyclical, making Nucor sensitive to business cycles. However, not only is it trading at a great value, but like Federal Realty, this company will reap heavy benefits through the Bipartisan Infrastructure Law.
This law will allocate $1 trillion to building roads, bridges, passenger rails and more, providing a massive boost to Nucor’s steel demand. Thus, its revenue and earnings could increase exponentially in 2022. At least, this is the hope among bulls concerned about inflation.
Best Stocks to Buy: Builders FirstSource (BLDR)
This Fortune 500 company gained 97.1% in 2021, way above the retail industry average of 39.4%. Expectations are for this supplier of building products and materials to continue this trend in 2022. Like Nucor, Builders FirstSource is another beneficiary of increased investment in infrastructure.
Positive sentiment around the home building business may take a hit from rising interest rates. That said, inventories in the U.S. remain near historical lows. Accordingly, this company’s near- to medium-term outlook appears to remain strong.
At least over the near-term, there’s a lot to like about this stock from an earnings growth perspective. For fiscal year 2021, Builders FirstSource expects an EPS growth rate of 206.5%, impressively outperforming the industry average of 34.5%.
If this wasn’t enough, this company’s Q3 results were astounding. Its net sales increased 140% year-over-year, reaching $5.5 billion. After its merger with BMC, the company’s gross profit became $1.7 billion, which is a 200.1% YOY hike.
Even though BLDR stock’s momentum is fast-paced, it does not mean this stock is overvalued. It is still reasonable at $70, providing investors with a great opportunity to buy this stock before it becomes expensive.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.