The market has changed dramatically over the past 12 months and with this change, some previously hot stocks have cooled off. Meme stocks and speculative growth names are out. Profitless software firms are on a big downswing. Now, investors are looking for companies that can thrive in a rising interest rate world with spiraling inflation and persistent macroeconomic uncertainty.
To put it simply, last year’s winners won’t cut it anymore. People need to be flexible. As market conditions change, so do the best stocks to hold.
Right now, these seven hot stocks have what it takes to keep powering higher despite the choppy overall market:
- Wells Fargo (NYSE:WFC)
- Vale (NYSE:VALE)
- Transocean (NYSE:RIG)
- ExxonMobil (NYSE:XOM)
- Banco de Chile (NYSE:BCH)
- Grupo Aeroportuario del Pacifico (NYSE:PAC)
- British American Tobacco (NYSE:BTI)
Hot Stocks: Wells Fargo (WFC)
One of the winners of the new market environment are the big banks. This is primarily due to the nature of current economic conditions.
Interest rates are set to rise sharply, which should improve net interest margins for the banks. Wells Fargo has been in the right place at the right time; its huge home mortgage business has surged thanks to the pandemic-driven housing boom. Wells Fargo’s investment bank is also showing improving results thanks to favorable market conditions.
As if that weren’t enough, Wells is fixing its cultural issues. The bank’s stock had underperformed for years due to its fraudulent accounts scandal. Now, however, the bank has cleared up most of the overhang from that.
As it does so, it can reduce its workforce and get rid of the extra compliance and back office costs. Wells Fargo intends to slash at least $8 billion annually in costs going forward, which should add something like $2 per share to its annual earnings. Throw in a massive earnings boost on top of an already rising tide for its industry, and it’s not hard to see why momentum traders love WFC stock right now.
Vale is one of Brazil’s giant mining companies. It operates in iron ore, nickel, copper and numerous other metals categories.
The firm faced a perfect storm in 2020 and the early part of 2021. The global demand for commodities appeared uncertain, Latin American economies went into a tailspin, and Brazil’s political situation appeared to be at a breaking point. Traders dumped VALE stock.
Everything has turned around now, however. The stock has rebounded from $12 to $17 in recent weeks. Brazil’s political situation has stabilized, at least for the time being. Metals prices are up dramatically, and the inflation wave is generating trader interest.
Perhaps most importantly, Vale is generating massive profits. It is going for around 5x 2021 earnings, and analysts forecast it bringing in a similar level of profits for 2022. The company is also paying out a dividend yield north of 10% at the moment. The current mining boom won’t last forever. But VALE stock seems too cheap even after accounting for that fact.
Hot Stocks: Transocean (RIG)
It looks like oil prices are finally high enough to force drillers back into action. For months, the price of oil and gasoline has steadily been creeping higher without too much response from the oil and gas industry. Burned by the persistent industry downturn since 2014, oil companies didn’t want to put capital to work.
That’s especially true given the increased regulatory burden and investor demands for green renewable investments and carbon neutral emissions levels going forward. It seemed like maybe the oil industry was done trying to expand.
In recent weeks, however, the price of crude oil hit $95 per barrel for the first time in ages. Investment banks are raising their price targets to $100 and beyond. At these price levels, finally, we’re starting to see oil companies think about greenlighting higher-risk, higher-reward offshore drilling programs once again. In other words, Transocean will at long last get to charge favorable rates for its drilling equipment.
For the moment, Transocean is still unprofitable on an accounting basis, and the stock is in the mid-$3s. Yes, RIG stock is up 30% in recent weeks. But if and when Transocean becomes profitable again and the hot money arrives, this could easily be a $5 or $6 stock in the blink of an eye.
For investors that want a lower-risk energy option than Transocean, good old ExxonMobil is back in fashion. The blue-chip oil major had fallen on hard times between 2014 and 2020, with the stock losing as much as two-thirds of its value during that brutal bear market for oil and gas.
However, ExxonMobil is on the upswing. The stock has rocketed from the $30s during the height of the pandemic to nearly $80 per share today. XOM stock is already up more than 20% year-to-date, which is particularly impressive compared to where the S&P 500 and Nasdaq are by comparison.
ExxonMobil maintained its dividend and investment program during the energy bust. This kept its shareholder base loyal, and its ability to produce oil in fine standing. Now, everything is swinging into place for Exxon. Prices of both oil and natural gas are up sharply. The company’s refining and chemicals division is also prospering as the economic upswing has boosted demand for refined petroleum products.
While Exxon shares are up dramatically over the past year, they’re still well short of the previous highs set back in 2007 and 2014, respectively. However, ExxonMobil seems set to earn record profits, particularly if oil does ultimately top $100 per barrel. If and when that happens, look for XOM stock to also reach new highs, which would be some 30% upside from here. In the meantime, the stock is offering a juicy 4.5% dividend yield.
Hot Stocks: Banco de Chile (BCH)
Banco de Chile is Chile’s largest private bank. The firm was founded way back in 1893 and has been listed on the New York Stock Exchange for the past 20 years.
Recently, BCH stock ran into a bit of trouble. That’s because Chile is holding a constitutional convention to reshape its governing document. This caused foreigners to dump all things Chilean on fears that the generally right-wing and prosperous country would devolve into the next Venezuela or Cuba.
As is usually the case, however, the scared money sold at the absolute lows. Chile’s new government direction has proven much more moderate than the critics had feared. As Chile charts a path toward a Scandinavian-style social democracy, investors are coming rushing back into the country.
BCH stock is one of the big winners of this reversal. Shares are already up a shocking 33% year-to-date and are up to their highest point since last June. The economic fundamentals for Chile are sparkling. It is one of the leading producers of both copper and lithium. You simply can’t have a green revolution without these vital metals. Chile has also broadened out its economy with investments in other fields such as winemaking and salmon farming.
Even after the recent rally in BCH’s shares, the stock is still going for around just 10 times earnings. It also offers an above-average dividend yield; exact payments vary year-to-year but are generally in the 5-6% annual yield range.
Grupo Aeroportuario del Pacifico (PAC)
Travel stocks have taken off. With the omicron variant starting to diminish, it seems travel operators may finally get to enjoy a more normal year in 2022.
For Mexican travel companies in particular, things have already normalized. Mexico was one of the fastest countries to reopen its borders during Covid-19, and it lifted nearly all its pandemic restrictions months ago. As a result, Mexico has soaked up a ton of tourism demand that would normally go to other places.
This has been fantastic news for Mexico’s publicly traded airport operators. Pacifico, for example, operates 14 airports in Mexico and Jamaica. Its flagship airport is in the big city of Guadalajara. It also operates industrial giant Tijuana, the tourist resorts of Puerto Vallarta and Cabos, and various other properties.
Incredibly enough, Pacifico’s traffic for January 2022 was actually up fractionally versus the same month of 2019. That’s right, Mexican airports are now drawing more traffic than they did pre-Covid. This was led by massive gains in traffic at Cabos, which is understandable due to its tourist angle. But also, Tijuana traffic has grown 29% since 2019, thanks to the boom in manufacturing and industry in Mexico. With Asian supply chains in tatters, manufacturers are moving as much work as possible to Mexico, which is great news for Pacifico shareholders.
Speaking of the stock, shares are up more than 20% since December, and have notched a 45% gain over the past 12 months. Pacifico shares are now at new all-time highs, and still have farther to run, given that the stock is still merely at a median valuation based on its historical averages.
Hot Stocks: British American Tobacco (BTI)
Tobacco has become one of the unlikeliest momentum trades in the stock market.
Seemingly, almost everyone hates the cigarette industry. It’s a vice that fails to meet most people’s standards of socially responsible investing. It’s also supposed to be a dying industry. Cigarette sales drop almost every year; profits have only held up due to price hikes. Or that used to be the story anyway.
Quietly, however, firms like British American Tobacco are pivoting. They’re now nicotine delivery platforms that have invested heavily in safer lower-risk product categories. The rise of vaping and other alternatives to traditional cigarettes could extend British American Tobacco’s lifespan a great deal longer.
Meanwhile, investors are seeking safe haven stocks. BTI stock, with its stable cash flows and massive dividend certainly fits that standard. BTI stock has already jumped from $35 to $46 just since December. That’s a massive move in this industry. Even so, it still yields 6.4%, which could attract more buyers.
On the date of publication, Ian Bezek held a long position in BCH, XOM, PAC, BTI and WFC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.