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Top 5 US-Focused Stocks Amid Surging Interest Rate and Dollar

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Wall Street has seen extreme volatility since the start of 2022, barring a two-month summer rally. Market participants continue to be affected by the after effects of COVID-19 even though the infection itself has subsided. These, along with the complete devastation of the global supply chain system and labor shortage, have caused the rate of inflation to skyrocket to a 40-year high.

In order to combat runaway inflation, the Fed adopted an ultra-hawkish monetary policy unprecedented since 1994. The sharp rise in the benchmark interest rate and the adoption of a tighter monetary policy led to a surge in US currency.

A higher interest rate regime has already increased the value of the US dollar in the international market. At this point, it will be fruitful to invest in stocks of business-oriented domestic companies with favorable Zacks rankings. Five of these actions are – BJ’s Wholesale Club Holdings Inc. BJ, NextEra Energy Partners LP CIP, Alliant Energy Corp. LNT, Potbelly Corp. PBPB and ARMOR Residential REIT Inc. ARR.

Rising interest rates

The inflation rate in the United States is currently at its highest level in 40 years. To combat rising inflation, the Fed raised the Fed Funds rate from 0-0.25% in early March to 2.25-2.5% in July. Yet, there are no signs of slowing inflation. After back-to-back FOMC meetings in June and July, the Fed is expected to raise the interest rate another 75 basis points in September.

A section of economists and financial analysts expect the central bank to raise the rate by 1% at the September FOMC meeting. Additionally, the Fed ended the pandemic-driven $120 billion-a-month bond-buying program in March and began trimming the size of its balance sheet by $9 trillion beginning in June.

As a result, US government bond yields soared. As of September 19, the yield on the benchmark 10-year US Treasury closed at 3.518%, its highest since April 2011. The yield on the short-term 2-year US Treasury closed at 3.949%, its highest high since 2007. This yield is the most sensitive to the Fed’s rate hike strategy. The yield on the long-term US 30-year Treasury note closed at 3.521%.

Soaring dollar index

As interest rates rise in the United States, global investors are trying to hold US dollar-denominated assets in order to earn higher yields. As a result, the ICE US Dollar Index (DXY), which measures the strength of the greenback against a basket of six major currencies, soared in 2022.

As of September 19, the DXY closed at 109.586, climbing 14.6% year-to-date. The index is currently at its highest level in 20 years. As for the US dollar, the British pound is at a 37-year low, the Japanese yen is at a 20-year low and the euro is at a 20-year low. In addition, the currencies of several major emerging economies fell to historic lows against the US dollar.

Why actions focused on the internal market?

Market players fear that a rising dollar will affect the sales of US multinationals as their products will be more expensive in international markets. Commercially oriented domestic enterprises are mostly insulated from any external shock since the United States is the only market for their products.

Despite the recent economic downturn, overall demand for the US economy is rock solid. Americans have saved more than $2 trillion in the past two pandemic-scarred years. The Fed is trying to calm demand by aggressively raising rates and reducing system liquidity to fight rising inflation.

In order to finance their expansion, these companies are less likely to take the debt route than their larger counterparts. This makes them less sensitive to the movement of interest rates and will help them outperform the market as a whole.

Our top picks

We narrowed our research to five U.S. stocks focused on domestic companies that show strong potential for the remainder of 2022. These stocks have seen positive earnings estimate revisions over the past 60 days. Each of our picks carries either a Zacks rank of #1 (strong buy) or 2 (buy). You can see the full list of today’s Zacks #1 Rank stocks here.

The graph below shows the price performance of our five picks over the past three months.

Zacks Investment Research

Zacks Investment Research

Image source: Zacks Investment Research

Big BJ ClubThe ability to navigate the challenging retail environment validates its strong customer value proposition and business model. BJ’s ongoing efforts to grow the membership base, simplify assortments, improve digital capabilities and accelerate club openings should support sales. We expect continued improvement in dues revenue as new club openings increase.

Clearly, BJ’s Wholesale Club’s acquisition of Burris Logistics’ perishable food supply chain puts it in an advantageous position to increase supply chain capabilities and expand fresh food offerings. A 6% jump in membership in the second quarter speaks to BJ’s ability to generate traffic. We estimate a 14.3% and 7.1% increase in total revenue in fiscal years 2022 and 2023, respectively.

BJ’s Wholesale Club has a projected profit growth rate of 10.8% for the current year (ending January 2023). The Zacks consensus estimate for current-year earnings for this No. 1-ranked Zacks company has improved 7.8% over the past 30 days.

NextEra Energy grows its national clean energy assets through organic acquisitions and initiatives. NEP has stakes in gas pipelines in Texas and is benefiting from an increase in natural gas production.

To improve flexibility, NextEra Energy entered into a few financing agreements to secure funds for the acquisition. NEP benefits from lower installation costs and improved renewable technologies. It has sufficient liquidity to meet its obligations.

NextEra Energy has an expected earnings growth rate of over 100% for the current year. The Zacks consensus estimate for current-year earnings for the second-ranked Zacks company has improved 3.2% over the past 30 days.

Allied Energy intends to strengthen and expand its infrastructure, retire coal-fired units, add clean assets to its generation, and become carbon neutral by 2050. Electricity generated from clean assets will help LNT meet customer demand.

Alliant Energy plans to invest $6.1 billion between 2022 and 2025. Returns on regulated assets provide it with earnings visibility. LNT primarily operates through four wholly owned subsidiaries – Interstate Power and Light Co., Wisconsin Power and Light Co., Resource and Corporate Services.

Zacks Rank #2 Alliant Energy has an expected profit growth rate of 6.5% for the current year. The Zacks consensus estimate for current-year earnings has improved 1.8% over the past 60 days.

Belly owns, operates and franchises Potbelly Sandwich Shops. PBPB operates on-site consumer establishments and offers sandwiches, salads, soups, chili, chips, cookies, ice cream and smoothies. Potbelly serves customers all over the United States.

Zacks Rank #2 Potbelly has an expected earnings growth rate of over 100% for the current year. The Zacks consensus estimate for the current year has improved by more than 100% in the past 60 days.

ARMOR Residential invests primarily in residential mortgage-backed securities issued or guaranteed by an entity chartered by the United States government. ARR’s securities portfolio consists primarily of securities issued or guaranteed by the U.S. government-sponsored entity and the Government National Mortgage Administration, backed by fixed-rate, hybrid-floating-rate, and floating-rate mortgages, as well as as unsecured notes and bonds issued by the GSE and US Treasury bills, and money market instruments.

ARMOR Residential sports a No. 1 Zacks rank. It has an expected earnings growth rate of 21.9% for the current year. The Zacks consensus estimate for the current year has improved by 8.3% over the past 60 days.

Want the latest recommendations from Zacks Investment Research? Today you can download 7 best stocks for the next 30 days. Click to get this free report

BJ’s Wholesale Club Holdings, Inc. (BJ): Free Stock Analysis Report

Alliant Energy Corporation (LNT): Free Inventory Analysis Report

ARMOR Residential REIT, Inc. (ARR): Free Stock Analysis Report

Potbelly Corporation (PBPB): Free Stock Analysis Report

NextEra Energy Partners, LP (NEP): Free Stock Analysis Report

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