Stocks hit by the pandemic
“While the S&P500 index is trading at a record high, some cyclical and virus-exposed pockets of the market remain underwater, creating an opportunity for tactical investors,” said David Kostin, Goldman’s head of U.S. equity strategy.
Value stocks have been market laggards recently, as a drop in Treasury yields, combined with the rapidly spreading delta variant, has made investors increasingly concerned about the economic recovery. The Russell 1000 value index is roughly flat this month, while the Russell 1000 growth index is up 4.5 percent.
Nonetheless, Kostin believes that the concern about the delta variant is exaggerated, and that the market will continue to be supported by strong equity demand and economic reopening.
“Investors are concerned about the Delta variant’s impact on economic growth, but the new strain should not pose a significant market risk,” Kostin wrote in a note. “Vaccinations, household and corporate equity demand, and attractive relative valuations will support equity inflows and prices.”
The S&P500 set a new high on Monday, bringing its 2021 gains to 17.5 percent.
Goldman identified a slew of tactical positions in virus-exposed stocks based on the following criteria for investors looking to capitalize on the rebound in cyclical names:
Stocks in the Russell 1000 that are in cyclical industries
Sales are expected to increase by more than 25% in 2021.
Positive sales growth in 2022
stocks that have fallen by at least 10% since May
JetBlue Airways, United Airlines, and Southwest Airlines are among the names on the list. a name associated with travel TripAdvisor was also included on the list.
New Fortress Energy and Valero Energy were also mentioned as energy stocks.
According to Goldman, the S&P500 energy sector is trading more than 10% lower than it was a month ago. Given the bullish outlook for oil, many energy stocks, according to Kostin, represent a tactical opportunity.
The Wall Street firm also recommends Freeport-McMoRan, GoHealth, and Harley-Davidson.
Tesla after earning results
The automaker is set to release its second-quarter report Monday after the market closes, kicking off a busy week for Wall Street corporate reports.
Bespoke Investment Group data to see how Tesla typically trades following its quarterly earnings report. According to Bespoke data, Tesla’s second-quarter report has historically been a mixed bag.
Historically, Tesla has outperformed earnings forecasts 60% of the time and revenue forecasts 70% of the time in its second-quarter report.
However, the stock has only risen half of the time in the subsequent session, for an average gain of only 0.4 percent.
Recent second-quarter earnings reports have resulted in volatile moves for Tesla’s stock, and not always in the direction that the earnings-per-share result would imply.
However, shares fell sharply throughout the session, finishing nearly 5% lower.
Tesla reported larger-than-expected losses in the previous two second quarters, but the stock reacted very differently. The stock dropped 13.6 percent in 2019 after missing estimates, but it gained 16.1 percent in 2018 after another miss.
The automaker’s stock has struggled this year, falling more than 6%. Wall Street analysts are divided on Tesla, with only 41% rating the stock as a buy.
McDonald’s rated as best restaurant stock
Analyst Gregory Francfort began covering restaurant stocks on Monday evening, and McDonald’s was his top pick.
The note stated that “restaurants generally require a ten-year remodel cycle to stay current with the look and feel of restaurants.”
McDonald’s has “invested heavily in its assets over the last three to four years, with a roughly $700K per box investment into its U.S. restaurants, an amount that rivals many of its peers’ initial total capex (leveraged through leases).” “We believe the significant asset improvement creates a competitive moat,” said Francfort.
Guggenheim also mentioned that the company’s digital offerings are promising.
“Delivery has gone well so far, but the economics of those orders remain questionable. The company is “making a big push around loyalty, which has the potential to be a bigger driver of U.S. sales growth than kiosks or order-ahead,” according to the note.
Wendy’s, Jack in the Box, and Yum Brands also received buy ratings from Guggenheim.
Auto Parts upgraded to strong buy
“We believe Advance has the most upside potential among auto part retailers over the next twelve months,” according to the note.
“We have grown more optimistic about AAP‘s risk/return profile, and we believe the industry, which is still highly fragmented, has opportunities to surprise on the upside through the remainder of CY21 and into CY22,” Griffin added.
Raymond James increased its price target on the stock to $250 from $215, representing a 16.8 percent increase in value.
Demand for auto repairs has been strong as the market for new and used cars has tightened due to increased demand and a chip shortage affecting production. Advance Auto Parts stock has already outperformed the market year to date, rising nearly 36%.
In the same vein, Raymond James downgraded Autozone from strong buy to outperform and O’Reilly Autoparts to market perform from outperform.