The U.S. central bank has maintained its short-term interest rates at near-zero levels for almost six years now. Also, the U.S. stock market recently celebrated six years of the Bull Run. That’s obviously not just a coincidence!
The Federal Reserve’s rate-cutting program, initiated in Dec 2008, has been an important catalyst for the U.S. economy, rescuing it from the ravages of the 2007-09 financial crisis that was marked with stock market downturns, foreclosures and prolonged unemployment. Today, the stock market indices are marching higher and reaching uncharted territories almost daily while the latest employment numbers are encouraging.
As consumer spending continues to be stimulated by a strong jobs market, low interest rates, strong U.S. dollar and cheaper fuel, the bull market may have more room to run in 2015. However, even as we expect the bull to celebrate a seventh birthday, growing up has never been easy.
Is the Fed Being Too Strict?
With the Federal Reserve’s expansionary monetary policy providing the U.S. economy its much-needed impetus, the agency is now contemplating a hike in the short-term interest rates, which could begin as early as June or September this year.
The tightening of the monetary policy usually preludes weak demand, contraction of corporate earnings and a possible stock market correction. While the potential negative drag from a strong dollar on overseas profits and lackluster revenue following slowing global economic growth remain key concerns, a sharp rate hike is the last thing the U.S. economy needs.
Though the Fed intends to move slowly and cautiously in the direction of higher interest rates, telegraphing their every move far in advance, the experience is still going to bring a lot of volatility to the markets. Moreover, speculations surrounding the timing of the Fed’s interest rate rise may result in increased market volatility.
However, before you decide to steer clear of the stock market apprehending the instability that lies ahead, you may want to reconsider one last time.
Rising Interest Rates: A Mixed Blessing
Most rate increases by central banks are designed to tame inflation or growth. However, this one is going to be different. Fed officials have made clear that they plan to raise rates slowly enough to avoid hurting the expansion or killing the bull market. Thus, we can rule out the detrimental impact of a sharp rate hike on the financial markets.
Moreover, even if the Fed begins tightening monetary policy this fall, it will likely take quite some time to impact the economy. This means that the U.S. economy still has some time to benefit from the prolonged period of low rates which will continue to stimulate the Bull Run.
Also, if you actually come to think of it, rising interest rates are often a by-product of rising economic growth and optimism. The expected interest-rate hike simply indicates that the economy is ready for the rates to move a little closer to normal levels. Though higher interest rates raise the cost of debt capital, a growing economy supersedes low-borrowing costs in the grand scheme of things.
And fortunately, economic growth is an obvious plus for the overall stock market.
Tackling the Situation
Naturally, when the broader market sentiments have a predetermined positive direction, there is hardly any strategy as lucrative as growth investing. However, at a time when volatility may continue to fetter the stock market, investors want to seek haven in safe income stocks.
When investors find themselves in such a tight spot, we believe that one of the smartest plays would be to go for mega-cap stocks (stocks with a market cap of around $100 billion or more) which still have high growth potential.
Mega-caps, usually the largest and most established companies in the stock market, have been around for a while. They tend to be stable, and many of them pay dividends based on their earnings. By virtue of their dominant market position and consistent cash-flow stream, these companies tend to be less risky investments.
Though mega-caps may not see the triple-digit returns that the small-caps sometimes achieve, they are less likely to see the big downturns frequently experienced by smaller companies. And with the current situation being unpredictable at best, you may not want to be lured by the expectant triple-digit returns (and end up losing money), but instead find a growth story in the relatively safer mega-cap stocks.
Our Picks
With the help of our new style score system, we have identified 3 mega-cap stocks with excellent growth potential. These stocks have a solid Zacks Rank as well.
Our Growth Style Score condenses all the essential metrics from the company’s financial statements to achieve a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.
Apple Inc. AAPL
The world’s largest company by market cap (roughly $759 billion), Apple has several catalysts to drive growth, including its latest offerings – Apple Watch and ApplePay. The availability of Microsoft Office and the partnership with IBM will likely boost iPad adoption among enterprises over the long haul.
This Zacks Rank #2 stock sports a Growth Style Score of ‘A’ and is expected to grow at a rate of 14% over the long term. Moreover, solid earnings estimate revision activity over the past one month has lifted the Zacks Consensus Estimate by 2.1% to $8.70 per share for the current year and by 0.7% to $9.26 for the next year.
Apple also offers an impressive dividend yield of 1.44%.
Verizon Communications Inc. VZ
Verizon Communications is one of the largest providers of wireline and wireless communications in the U.S. The company’s consistent market share gains, strong LTE sales and the rollout of FiOS Internet make us confident about its long-term growth story. Verizon is presently riding high on increased smartphone sales and we believe that the introduction of new devices will likely boost data revenues in the future.
With a current market cap of roughly $204 billion, this Zacks Rank #2 stock sports a Growth Style Score of ‘B.’ Moreover, it offers an impressive dividend yield of 4.39%.
Verizon has also been witnessing solid earnings estimate revision activity over the past one month, which has helped boost the Zacks Consensus Estimate by 4.6% to $3.83 per share for the current year and 4.2% to $3.99 for the next year.
UnitedHealth Group Inc. UNH
Minneapolis-based UnitedHealth provides comprehensive health care management services through organized health systems and insurance products. Strong performance by the company’s Optum segment, expanding business on public exchange markets and continued growth in government business are key growth catalysts, in our view.
With a current market cap of roughly $113 billion, this Zacks Rank #2 stock flaunts a Growth Style Score of ‘A’ and is expected to grow at a rate of 10.5% over the long term.
UnitedHealth has seen solid activity on the earnings estimate revision front as well. Over the past 30 days, estimates for the current year have inched up 1% to $6.25 a share, while for the next year it has improved 2.3% to $7.15 a share.
To top it all, the company belongs to the MED-HMO industry, which presently lies in the top 7% of industries, per the Zacks Industry Ranking system.
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