Interest rates

6 stocks for a 2022 of higher interest rates and slower earnings growth

Don’t let inflation fears dominate your investment thoughts. Also save time to worry about profit growth.

Below are some statistical stomachaches and portfolio defeatism, as well as a Wall Street bank’s best stock picks for the time.

The fourth quarter reporting season is about 80% complete and the results are strong enough. Most companies beat expectations and earnings per share are on track to rise 26% from depressed levels a year ago. This, however, marks the end of easy comparisons.

In the current quarter, earnings are expected to increase by only 5%. The estimate for the full year is a bit brighter at 8%, but don’t count on that. Historically, the February consensus for annual earnings has overstated the actual number by five percentage points on average, according to BofA Securities. If we assume earnings growth of just 3% in 2022, the S&P 500 is valued at 21 times forward earnings.

Near-zero interest rates have made expensive stocks a bargain over the past decade, but now rates are on the rise. Inflation is the highest since 1982 and the financial press has run out of pop culture references to make the point. I personally burnedHEY. and the Commodore 64. The Federal Reserve must act before I get to Q*bert.

Goldman Sachs has just raised its estimate for rate increases to seven this year from five. He believes the Fed will move a quarter point at a time, but half points are also possible.

Wait: don’t low bond yields tell us that inflation is going to come down fast? Yes, but there are three issues to bet on this. First, yields rose on tiptoe. That on the 10-year Treasury bond rose from 1.8% to more than 2% this month. Second, last week the Fed was still buying Treasuries to suppress their yields. He plans to stop, of course, but only after a few more weeks, so as not to harm the economy by appearing too alarmed at the damage he is causing the economy.

The third problem with listening to the Treasuries is that they don’t seem to know anything. Jim Reid, the top credit strategist at Deutsche Bank, recently plotted historical 10-year Treasury yields against what the rate of inflation turned out to be over the next five years. The pattern looked a bit like a milkshake made without the blender lid. There was just a hint of predictive power at returns below 6%, and it was negative. In other words, Treasury yields are probably saying nothing now, though they might quietly whisper that investor returns here are likely to stink.

I’m not going to lighten stocks. Starting valuations are a poor predictor of one-year returns, as history shows. Plus, every time I write a can’t-miss thesis on why the market is going down, you pranksters drive prices up to make me look like a fool.

It’s hilarious, but I’m over you. I’m sticking to my usual diversified portfolio of stocks and safe havens like bonds and cash so I can lose money this year in uncorrelated ways like a sudden sell-off or through the corrosive effects of inflation.

And who knows? Maybe markets will find a way to shake off their slow start to the year, shrug off the barrage of rate hikes to come, and extend their magnificent bull run.

For investors looking to shift their holdings to better match current conditions, value stocks remain attractive. They have outperformed by eight percentage points this year, meaning the Russell 1000 Value Index is down just 1%, compared to 9% for the Russell 1000 Growth Index.

This comes after 15 years of growth stock dominance. The discount for value stocks remains exceptionally large. Additionally, in fourth-quarter results, value looked more buoyant than growth, boosting earnings 30% from 25%, according to Credit Suisse. He expects value stocks to continue to lead earnings growth this year.

Additionally, there have been an uncomfortable number of earnings day bursts for growth stocks recently.


netflix

(symbol: NFLX),


Teradyne

(TER),


PayPal Credits

(PYPL), and


Metaplatforms

(FB) each suffered stock declines of more than 20% the day after they reported, the highest proportion for growth stocks since the dot-com bubble of the late 1990s, according to BofA.

For easy exposure to value, there is always


Invesco S&P 500 Pure Value

(RPV), an exchange-traded fund. The key to picking individual value stocks, according to investment bank Jefferies, is to separate cheap stocks with upside drivers from traps. To that end, the company sifted through its coverage universe for buy-listed names with low price-to-earnings ratios and high free cash flow yields, then polled its analysts for their most compelling picks. . Here are six of them ranked by my enthusiasm, starting with lukewarm and going through lukewarm.


Anthem

(ANTM), a health insurer, at 16 times its earnings, has increased its earnings per share by 13% on average over the past decade, and could have been cautious with its 2022 forecast.


Braunschweig

(BC), a boat maker that earns 10 times its profit, is enjoying an influx of young buyers getting into the water.


Freeport-McMoRan

(FCX), 12 times earnings, should benefit from tight copper stocks.


Microchip technology

(MCHP), 16 times earnings, looks likely to pay down debt and increase its dividend. Recent return: 1.4%.


Owens Corning

(OC), 10 times earnings, manufactures insulation and roofing materials, and strong demand could last longer than the stock price suggests. And


Stellantide

(STLA), just four times its profits, is 12 to 18 months behind rival automakers on the switch to electric, but its Ram 1500 pickup trucks have just overtaken Chevy to become the second-largest U.S. seller behind


Ford engine

(F).

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise Podcast.