Every month, the bank publishes a focus list of the top ideas from researchers. Almost all of the stocks on JPMorgan’s list are rated overweight and fall into one of three categories: near-term, growth, or value.
JPMorgan added four new stocks to its list on Friday: AppLovin, a mobile marketing platform, DCP Midstream, a natural gas company, Seagen, a biotechnology firm, and Spirit AeroSystems, a maker of aerostructures.
Analysts removed PDC Energy, Raytheon Technologies, and Varonis Systems, all of which are involved in the oil and gas industry.
According to analyst Alexia Quadrani, JPMorgan is bullish on AppLovin as Apple privacy changes drive app developers and publishers to seek traditional user acquisition channels.
“APP continues to trade at a significant discount to platform enablement peers, a gap that we believe will close as it executes on its strategy,” Quadrani said.
The bank likes Seagen’s approved cancer drug portfolio as well as earlier stage treatments in the pipeline.
“In our opinion, Seagen’s ongoing evolution into a multi-product oncology company provides a diversified base business with the potential for meaningful expansion,” according to analyst Cory Kasimov.
Aside from the new additions, JPMorgan shifted its strategy for Dell Technologies from near-term to long-term value. According to analyst Samik Chatterjee, Dell is well-positioned going into October due to its exposure to commercial PCs as well as the server and storage markets.
General Motors, Target, and Facebook are among the other returning stocks on JPMorgan’s full list.
Stocks with major momentum
According to Refinitiv, earnings at S&P500 companies increased by 96.3 percent in the second quarter. In two weeks, JPMorgan Chase and other major banks will kick off the third-quarter earnings season.
“Over the last five quarters, S&P500 companies have outperformed earnings expectations by unprecedented margins,” said Chris Senyek of Wolfe Research. “The string of strong results should continue into the third quarter of the 21st fiscal year.”
The Wall Street firm anticipates that S&P500 companies will outperform earnings per share expectations by the high single to low double digits.
Wolfe identified stocks with the most earnings momentum heading into the new reporting season for investors betting on a continued earnings rebound. The firm searched the S&P500 for stocks that met the following criteria:
Stocks that have outperformed the market in the aftermath of those reports.
Companies whose third-quarter earnings per share estimates have been revised up by more than 5% since mid-July
Alphabet, Google’s parent company, could also produce strong results and positive stock price movements as the third-quarter earnings season approaches.
Wolfe also mentioned Dish Network, Ulta Beauty, Under Armour, and Tyson Foods.
Bank of America recommendations
Each quarter, the W
all Street firm publishes a list of ten high-conviction, short-term stock recommendations. The most recent list was released on Friday.
The S&P500 ended the third quarter slightly higher, but gains were weighed down by a negative September performance as stocks battled seasonal weakness, fears of Fed tapering, and global growth concerns.
′′[S&P500] upside is getting tricky, so we recommend being selective,” said Anthony Cassamassino of Bank of America in a note.
Bank of America is optimistic about General Electric as the aerospace industry recovers.
“An August drop in commercial air flights was caused by the delta variant of Covid-19. High-frequency data from the BofA Global Aerospace team, on the other hand, shows a recovery in September. With a flight recovery already underway, we anticipate improved sentiment in the fourth quarter,” analyst Andrew Obin said.
The firm also stated that GE’s operational improvements should increase profit margins.
Uber, a ride-sharing and food-delivery platform, has been named to Bank of America’s list. The company believes that as the pandemic unemployment stimulus wears off, Uber’s labor shortages will improve.
“This will increase driver supply in the United States, where a driver shortage has resulted in fewer trips and take rates, with driver earnings increasing by more than 20% [year over year],” analyst Justin Post said.
Bank of America will be watching for Uber to break even and reach profitability, which is expected in the third quarter.
Extra Space Storage is also favored by the bank as a defensive play in the fourth quarter. Defensive stocks are those that tend to be stable regardless of how the market performs overall.
According to Bank of America’s Jeffrey Spector, “we believe EXR’s competitive advantages are an experienced management team, the largest third-party management platform, a proprietary revenue management system, and high quality demographics around its stores.”
Extra Space Storage’s performance will be boosted by an improving economy and strong consumer, according to Bank of America.
Other names on Bank of America’s list of top ideas include APA, an energy company, and Fox Corp., a media conglomerate.
Barclays is bullish on airline stocks
“We are adding exposure to the group, but cautiously, favoring low cost and low fare airlines by upgrading Southwest Airlines to Overweight,”
As vaccines were approved, airline stocks increased in the fourth quarter of 2020. The rally lasted until the first half of 2021, but it slowed over the summer. Southwest shares are up more than 16 percent year to date, roughly in line with the broader market but trailing American and United.
According to Barclays, the low-cost airline appears to be a safer bet with growth potential for investors.
“Southwest provides long-term investors with a strong balance sheet, a favorable orderbook with Boeing, and a historically profitable business model. We see the company leveraging low-cost Boeing MAX 737 deliveries to complete network expansion that was delayed prior to the pandemic due to the grounding of the MAX,” the note said.
Southwest’s price target has been raised by Barclays to $75 per share from $64. The new target is 38% higher than where the stock closed on Friday.
The Barclays call follows a similar note from JPMorgan last week, in which the firm upgraded Southwest and was bullish on the industry overall.
Pricing power measures the impact of a price change on the demand for a given product. If a company with strong pricing power raises its prices, it may not have a negative impact on demand if it has a unique value proposition, such as Apple and the iPhone. In a note issued on Tuesday, UBS stated that “surging shipping costs, rising raw materials, supply chain issues, and accelerating wage growth” will make it “an even more important theme for relative returns.”
UBS’ list builds on the firm’s previous research into strong pricing power stocks, which it claims outperform during and after periods of high inflation.
Inflation is at its highest level in about 30 years, according to some measures. The Commerce Department reported Friday that the core personal consumption expenditures price index, the Federal Reserve’s preferred measure of inflation, was up 3.6 percent in August compared to the same month a year ago.
UBS market strategists examined pricing power trends, cost pressures, and margin outlooks for stocks across their coverage universe. They then identified stocks that are buy-rated by the firm’s analysts, have at least 10% upside to their price target, and scored in the top 33% of their respective sectors based on UBS’s composite score for pricing power, margin momentum, and input cost exposure.
On UBS’ list, Apple is the most valuable company in terms of market capitalization. The firm sees a 23% upside to a $175 price target and expects demand to exceed pre-Covid levels in the next three years, even with higher average selling prices.
UBS believes that because of its market share in the global PC and smartphone markets, it will be able to introduce a branded battery electric vehicle at some point and achieve a 5% market share in that sector. On a year-to-date basis, Apple shares have risen about 7%.
While there is plenty of competition among athletic and athleisure retailers, UBS sees Nike as a long-term outperformer and has a $185 price target on the stock, implying a 26% increase. This year, it is up about 6%. Nike’s stock has recently underperformed after the company issued a warning about supply chain issues.
“We believe the market underappreciates how Nike’s investments in product innovation, supply chain, and e-commerce are working in concert to drive unit growth and average selling price increases,” analyst Jay Sole wrote in the note. “The Nike brand currently ranks first in global mindshare, and the company has significant room to reduce promotions.”
The crude and natural gas company EOG Resources, which has the most implied upside, will face some inflationary pressure in 2022, but UBS expects its capital efficiency to offset some of that pressure. It sees a 42 percent increase in EOG. This year, the stock has increased by 75%.
Semiconductor chips stocks
For months, the supply of semiconductor chips — which are used in everything from household appliances to smartphones and vehicles — has been tight, with automakers struggling to keep up. Semiconductors are essential to the operation of a car and are an essential component of electric vehicles.
While demand for semiconductors has increased, there is still room for growth, according to a research note issued by BofA on September 27 on suppliers to the auto industry. “Investors may be underestimating chip suppliers’ newfound pricing power, including their ability to pass along rising foundry costs,” they said. A foundry, also known as a fabrication plant, is a factory that manufactures chips for other companies.
“Another important factor driving auto semi sales growth in 2021 has been the acceleration in Electric Vehicle (EV) penetration,” the analysts wrote. They added that EVs have two to four times the semiconductor “content” of a standard vehicle.
Semiconductors are also used in advanced driver assistance systems (or ADAS), which are found in many vehicles. According to BofA, the ADAS market will grow at a rate of more than 20% per year.
The following are the bank’s top stock picks in the sector:
Analog Devices is a favorite of the bank because of its “best in class profitability” and differentiated products. Earlier this month, the company announced a $2.5 billion share buyback program, which means it will return cash to shareholders.
Infineon, a German firm, was praised by the bank for its “superior organic sales” and “leading positions in large, long growth duration automotive and industrial semiconductor markets.”
Microchip Technology was chosen for its combination of “growth, execution, profitability, and leverage.” Ganesh Moorthy, the company’s CEO, has warned that the chip shortage could last until next year.
Texas Instruments was recognized for its “best-in-class profitability and cash flow returns.”
NXP Semiconductors is a Dutch company.
“We reiterate auto semis as a top three preferred group (along with computing and capex/semicap equipment) for the coming year,” the analysts concluded.