Those of you who have been watching the markets and trading in 2020/2021 would have most likely made several good picks over the 2 years. In 2020 the Dow gained 6%, S&P500 gained 15% and Nasdaq gained over 42%. In 2021 it was +20%, +25% and +14% respectively.
However, in December 2021 things took a turn as the Federal Reserve Bank of America (FED) finally decided that it was time to slow down stimulus and raise interest rates in 2022 in order to curb rising inflation. This is also known as Quantitative Easing (QE). However, what has spooked the markets is the tone adopted by the FED committee. It has turned very aggressive or hawkish, as analyst would call it, towards reducing their balance sheet (please click link for detail info) & raising interest rates. It’s now estimated that there will be 2-3 rate hikes in 2022.
And if so, how does this affect the market ?
Firstly, with rising interest rates investors can opt for less riskier asset classes such bonds which would then reduce demand for stocks, especially high growth stocks with lofty evaluations but no earnings yet . Secondly, cost of funds will go up which means margin trades are going to be more expensive. Thirdly, perhaps more importantly higher rates means cost to fund the projects for high growth companies (tech companies) increases and affects their bottom line. Furthermore, many of these companies have no or little current profits and so their future profits are discounted back to today’s value, therefore the higher the interest the lower the value. As a result, we see a shift in cyclical or more established “old school” companies that have current earnings and a steady track record for offering attractive dividends.
Will the FEDs change their tone again in the coming weeks looking at pace of the spread of Omnicron virus in US and around the world ? They may but one thing is for certain, QE measures are being implemented in 2022 and a rate hike in first quarter 2022 has 80% probability of happening. Therefore, we should start trading cautiously and wisely without panicking as there are going to be great buy opportunities in some of our favourite stocks. This is also a good time to have a balance portfolio of tech (if you are buying the dip), non tech stocks, mainly financial stocks.
Here is our pick for a balanced portfolio in the first half of 2022 based on several key fundamentals like P/E ratio, reserve cash flow available, demand outlook for their products and services. Basically “real” companies and not “good story” or “concept stocks “
Citigroup (C)|USD65.78|7th Jan 2021 Closing|Short to Medium Term Investment
We start with the banking stocks and here we have a bank that is involved in a broad spectrum of financial services all over the world from commercial banking to investment banking & securities brokerage. Citigroup shares has seen a 10% rise in the last three weeks already and posts earnings at the end of the trading week on the 14th of Jan. Although the analyst have given Citi an average price target of USD 80.00, this could however be a quick opportunity
to enter just below USD65.00 and get out at USD70.00-USD75.00 for those investors looking for a shorter term for investment.
Jeffries Financial Group (JEF)|USD40.38|7th Jan 2021 Closing|Medium to Long Term Investment
This is another pick from the financial sector but Jeffries is more focused on investment banking and capital markets, asset management and direct investing. It has a very attractive P/E ratio of 6.70 which represents a good value. According to analyst this stock has an average price target of USD46.50 and posts its next earnings on Tuesday, 12th of January. Any price of USD40.00 or below is a good entry level.
Microsoft Inc( MSFT)|USD314.04|Jan 7th 2021 Closing|Medium to Long Term Investment
MSFT has seen a 6% decline in the first week of trading in 2022 as part the tech sell off. It is fundamentally one of the strongest companies in the world with projected growth in every business segment they operate in. It is a good time to take advantage of the tech sell off and add this into your portfolio if you haven't already. Look out for further softening in prices next week. We will look to add MSFT in our own portfolio between USD305.00 to USD310.00.
Meta Platforms Inc (FB)|USD331.79|Jan 7th 2021 Closing|Medium to Long Term Investment
Formerly known as Facebook, Meta Platforms has held up pretty well this week and has not been affected by tech sell off because it is a cash rich mega tech company with very strong earnings. Its also one of the most important marketing platforms in the world today. Furthermore, according to analyst, by 4th quarter 2021 FB would have generated over USD35 billion in free cash flow which will lead to more stock by backs in 2022 leading to higher stock prices. Along with massive investments in the upcoming Meta Verse this is one of the stocks to own for the future. Although FB has had its share of controversies lately and paid over USD5 billion in fines to US regulators for privacy breaches in 2019, analyst have given the stock an average consensus price target of USD399.00 for 2022.
Builders FirstSource, Inc (BLDR)|USD78.63|Jan 7th Closing| Medium to Long Term Investment
BLDR is a supplier of building products, prefabricated components and value added services for residential construction and remodelling. It provides integrated homebuilding solutions to its clients across 42 states and 580 locations in America and has its base in Dallas, Texas. This is a great value play that investors should consider. It has a steady stream of revenues with earnings growth of 568% in 2021 and a strong projected earnings for 2022 of USD8.27 per share based on recent estimated by BA Davidson. It also trades at a very low P/E ratio of 10.8 making it a good value stock to add into your portfolio and has a short to medium term target price of USD92.00.