Stocks opened sharply higher Wednesday ahead of the Fed’s vital rate-policy decision later this afternoon. The market reacted favorably to a slew of earnings reports that arrived yesterday after the close, most notably from Microsoft that beat on both the top and bottom lines. The tech giant also gave an upbeat forecast for its fiscal third quarter, citing an improved outlook in its cloud division.
The market is digesting the premarket earnings announcements from firms such as AT&T and Boeing, and so far has responded positively. Investors have been looking for buyers to step in during the recent market selloff, yet there haven’t been sufficient reasons for them to do so after a record run in equities.
Positive earnings beats across the board may at the very least provide a temporary shield from the dramatic selling we have witnessed to kick off the new year. With prominent companies such as Tesla and Intel due to report after the bell today, as well as names reporting tomorrow such as Apple and Mastercard, the next few days may bring a much-needed reprieve if the reports show significant strength from the prior quarter along with positive guidance.
The Big Moment: Fed Decision
Even with constructive earnings beats this week, we’ll see if the market can hold on to these gains as all eyes are on the Fed. The committee’s two-day policy meeting is set to conclude with a decision due out at 2pm ET, which will be followed up by comments from Fed Chairman Jerome Powell.
Powell has been dovish during his tenure, but recent pressure from Congress and Washington to combat inflation may turn his tone more hawkish. The Federal Reserve is widely expected to wrap up its tapering of asset purchases by March and begin to raise interest rates, but some economists are speculating that the Fed may quicken the pace of tapering and end asset purchases by February.
What to Do Now
The conflicting forces of an above-average earnings season and a more hawkish Fed will continue to contribute to market uncertainty. While it is tempting to buy some of the beaten down names during this market dip, the more prudent course of action is to simply wait until the picture becomes a bit clearer. There is likely some more volatility ahead this year – I recommend sticking with companies that have held up well through the volatility.
Investors will be looking for Powell to provide some answers around the timing of future rate hikes, but the Chairman may stick to his dovish tone amid the global market uncertainty and seek to avoid causing further damage. In the event he employs a more ‘wait-and-see’ approach as the Fed gathers more data in the new year, energy companies will likely continue to rally. Let’s take a look at two companies that may have some more room to run.
These two energy companies are both components of the Zacks Oil and Gas – Integrated – International industry group, which is ranked in the top 2% out of all 254 industries. Historical studies have illustrated that approximately half of a stock’s future price appreciation can be attributed to its industry grouping. By investing in the top Zacks Ranked Industries, investors have the ability to dramatically improve their trading results.
Eni S.p.A (E)
A Zacks #1 (Strong Buy) stock, Eni S.p.A. is engaged in the exploration, production, refinement, and transportation of crude oil and natural gas. Based in Rome, Italy, the company is a global leader in the integrated energy market. Founded in 1953, E operates in over 80 countries and also provides engineering and project management services to the petroleum industry.
Trading at a relatively undervalued 7.3 forward P/E, E has beaten earnings estimates in 3 out of the past 4 quarters. The company most recently posted EPS of $0.93, a +14.81% surprise over the Zacks Consensus Estimate of $0.81. E has been outperforming the market over the past year, delivering investors a greater than 55% gain during that timeframe.
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As crude oil prices have continued to rise, the outlook for Eni S.p.A remains bullish. E is benefitting from an increased production outlook thanks to a huge discovery in oil resources through the first nine months of last year. Its offshore Ivory coast discovery caused the firm to revise its guidance upward. Looking into this year, analysts have increased their EPS estimates by 9.09% in the past 60 days.
The Zacks Consensus Estimate for 2022 EPS is now $4.08, which would represent nearly 34% growth relative to last year. E is scheduled to report earnings on February 18th.
BP p.l.c. (BP)
BP is a global energy firm that operates as a holding company of one of the world’s largest petroleum and petrochemicals groups. BP’s main activities are exploration, production, refinement and transportation of crude oil and natural gas. The company is also involved in the manufacturing and marketing of petrochemicals, in addition to a growing segment dedicated to solar power generation. BP was founded in 1908 and is based out of London.
A Zacks #1 (Strong Buy) stock, BP has exceeded earnings estimates in four of the past five quarters. The company most recently reported EPS of $0.99 for the quarter ending in September, a +3.13% surprise over the $0.96 Zacks Consensus Estimate. BP has averaged an earnings beat of 10.82% over the prior four quarters, helping to push the stock 47.3% higher in the past year.
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Despite the impressive run, BP still trades at just a 6.92 forward P/E, suggesting the stock is still relatively undervalued. Higher crude prices will continue to benefit the company’s bottom line. Another support line for investors has come in the form of share repurchases, in which the company has stated that it anticipates buying back $1 billion worth of shares every quarter. On the dividend front, BP projects a hike in annual dividends per share of 4% through 2025.
As the company makes its way into the new year, analysts have upped their earnings estimates by 5.58% in the past 60 days. The Zacks Consensus Estimate for 2022 EPS now sits at $4.54, which would translate to growth of roughly 19% relative to 2021. BP is slated to report earnings on February 8th.
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