Best stocks to buy
The latest Wall Street analysis has led analysts to identify some of the best placed stocks as the second half approaches.
Uber, NetEase, OneMain, American Woodmark, Sunrun, and Sunnova are among them.
NetEase
According to Morgan Stanley, this fall will be a blockbuster in more ways than one for the China-based video game company.
“History suggests outperformance in the next six months,” analyst Alex Poon recently wrote.
Poon believes that NetEase’s upcoming release of several major titles is a good omen for the stock.
“All previous game launch cycles have resulted in strong stock price performance,” he wrote.
According to the company, shares of NetEase have risen in recent years following the release of games such as Knives Out and New Ghost.
“NetEase’s game launches/revenue growth have been strongly correlated with stock price since 2015, implying potential outperformance in the next six months, driven by Harry Potter and Diablo Immortal,” Poon said.
Harry Potter will be released in the third quarter of this year, while Diablo will be released in the fourth quarter.
Furthermore, the stock’s valuation is “attractive,” and investors should buy it now, according to the firm.
This year, the stock is up 11.5 percent.
OneMain
Piper Sandler said in a note this week that the financial services company is experiencing “a series of tailwinds.”
Analyst Kevin Barker wrote that the firm raised its price target to a Street high of $73 per share from $63 and said OneMain was its top pick for the rest of the year.
“In our opinion, OMF is the best positioned stock in our coverage over the next 6-12 months,” he stated.
OneMain shares, according to Barker, have had a bit of an overhang due to a large selling shareholder, but the stock is getting a bad rap.
“We believe the stock has the potential for a material re-rating once the overhang is lifted,” he said, “especially if we see new directors on the board and a shift in capital allocation policies.”
Furthermore, Barker stated that resuming buybacks could “enhance” shareholder returns.
“We believe a buyback policy could result in higher EPS growth and a much higher P/E multiple on the stock,” Barker said.
The company went on to say that OneMain is undergoing a “significant strategic shift,” and that patient investors will be rewarded.
This year, the stock is up 27.5 percent.
Woodmark of the United States of America
Loop Capital, an investment firm, upgraded the kitchen cabinet manufacturer to buy from hold this week.
According to analyst Garik Shmois, the firm’s sales growth remains strong, and recent survey checks indicate a prime buying opportunity.
“Despite concerns about tough comps and the recent pause in new residential construction,” he wrote, “our survey gives us confidence that sentiment has gotten too negative and that sales should outpace expectations while commodity cost inflation appears to have peaked.”
In fact, the company claims that dealer traffic is as high as it has ever been.
“The shares have performed poorly recently, but from a stock picking standpoint, we believe there is value here,” he added.
Shmois acknowledged that his call was out of line with the majority of investors, who have been wary of housing stocks.
Shmois, on the other hand, believes the stock is simply too appealing right now, given the share price decline.
In addition, the firm stated that price increases appear to be sticking, while hardwood costs have begun to “roll over, which should alleviate cost pressures” in tandem with increased demand for residential construction.
“We have increased confidence in AMWD that margins will begin to recover in the second half of their FY22, which should drive the stock higher from its current low levels,” he said.
American Woodmark’s stock is down 5.3 percent this month.
The second-half 2021 looks promising for stocks
Through almost half the year, 2021 has provided investors about three times more profit than risk, and the 14% return of S&P 500 is just a few short falls of 5%..
When it comes to stocks, the current trend almost always gets the benefit of the doubt. Last week, investors collectively concluded that the minor ruckus caused by a subtle shift in Fed messaging and a purge of crowded “reflation” trades was unwarranted given all that had not changed about the benign backdrop, as hinted here a week ago.
The bulls can take solace in the fact that strength often begets strength. According to Schaeffer’s Investment Research, in the 17 previous years since 1950 when the S&P500′s total return in the first half exceeded 12%, the index continued higher in all but four of those years in the second half.
For all of those years, the average second-half return was 7%. Only once in the four losing years – the infamous 1987 boom-and-crash episode – did the market give up a significant portion of its first-half gains.
So the broad tendencies point higher, though one of the current criticisms of the market’s latest rally is that it hasn’t been particularly broad. In fact, the S&P500 set a new record high last week, while fewer than half of the index’s stocks were even above their individual 50-day moving averages, indicating a rare state of internal disagreement.
According to SentimenTrader, this has only happened six times since 1928, with the majority occurring in the later, more volatile phases of bull markets or, on a couple of occasions, at significant peaks.
That is far too small a sample size to confidently predict future trends. And it’s a bit of a quirk of the market itself, which has flattened out quite a bit since mid-April, when the S&P is up just over 2%. But, at the very least, it suggests a more selective tape than has been the case since last fall.
Market resiliency
In terms of small samples and market flattening: In recent months, there has been a significant divergence between the current 90 percent rally from the March 2020 low and the only two comparable bull-market launch phases. This chart prompted many forecasts of a downward choppy phase beginning in the spring, but the market has remained resilient thus far.
It’s not difficult to see why the ramp since the Covid crash has outperformed those earlier celebrated rallies by 30 percentage points: The uniquely compressed nature of last year’s economic downturn, the nearly immediate and overwhelming policy response, the lack of scarring on corporate balance sheets, the return to record earnings within a year, and a Fed that is not looking for reasons not to tighten policy for as long as possible.
The S&P500 is less expensive than six months ago, despite a 14 percent year-to-date gain, because earnings results and forecasts have risen much faster. In this age of corporate prosperity, share buybacks are about to roar back to historic highs, with few hard capital-allocation choices required.
Credit conditions are lavishly forgiving – Centene, a healthcare company with a junk-level credit rating from Moody’s, sold seven-year debt last week at a yield of less than 2.5 percent. The S&P500 Volatility Index (VIX) continues to fall, hovering near 15 and on the verge of the low teens, where it has settled during recent years’ calm, grinding rally phases.
This is not a foolproof or permanent formula for gaining without suffering, but it is a plausible explanation for why this rally has avoided nasty retaliation thus far.
There is also the more common seasonal weak patch for stocks, which typically begins around mid-July. In most cases, such inclinations are the weakest of inclinations and are no match for a strongly trending market. After all, the week following June’s options and futures expirations was expected to be among the weakest of the year based on decades of data, yet the S&P gained nearly 3%.
Threats to derail the bull’s progress
Without a doubt, the bull market is entering a phase in which additional good news brings potential offsetting negatives into focus, and attention will increasingly shift to prospects for 2022, when earnings comparisons will be tougher and fiscal help will be less available.
Citi strategist Tobias Levkovich issued a cautious tactical outlook for the coming months on Friday, stating that “investors may encounter four different catalysts (tapering discussion, inflation, margin pressures, and taxation) that may coalesce around the same time.” Sentiment remains upbeat, valuation is unappealing, and the Street already anticipates strong profit trends.” He’d rather wait for a pullback before buying to capture some upside to his modest mid-2022 target for the S&P of 4350 (up less than 2% from Friday’s close).
From some perspectives, sentiment appears to be upbeat. Overall retail and institutional equity allocations, for example, are near historic highs. In addition, both professional and individual surveys show a low number of admitted stock bears.
Nonetheless, Deutsche Bank strategists point out that systematic and quantitative funds continue to have low commitments to stocks in comparison to history, which could be lifted if the VIX continues to fall and drives their models deeper into equities. In addition, the weekly NAAIM survey of active-trading investment advisors revealed that exposures were moving back toward neutral.
According to Levkovich’s survey of 70 institutional clients, the S&P500 will see no further gains for the rest of the year, and 63 percent believe a 20% market pullback is more likely than a 20% rally from here.
That doesn’t sound very upbeat. But it also doesn’t appear irrational in a market that has risen dramatically over the last 15 months, then fallen flat with a loss of momentum in the last ten weeks, and where “Don’t fight the tape and stay involved, but keep expectations in check” might not be the worst way to enter the second half.
