Stocks and inflation
According to Bernstein, rising inflation may be a “great issue” for sustainable investors, who called this trend the best stocks.
Bernstein screened for stocks by considering three ways that long-term investors can prepare for rising inflationary pressures:
- Look for high-scoring ESG stocks that are positively correlated with rising bond yields.
- Investing in ESG stocks with strong pricing power and a high score.
- Identifying firms with increased exposure to the energy, commodities, and financial sectors.
Bernstein recognized that investors may struggle to prioritize so-called “sin” stocks, such as energy and commodity companies, even though these “value” stocks typically perform well when inflation and bond yields rise. The market considers value stocks to be underappreciated.
Bernstein also stated that financials are often overlooked by ESG investors because determining their environmental credentials can be difficult.
According to the analysts, U.S. ESG funds are “not that well positioned” for inflation because they are underweight on so-called value stocks. State Street, Lear, and Bank of New York Mellon, on the other hand, were named among the top picks of those positively exposed to rising bond yields by the bank. According to Sustainalytics data, the three U.S. firms scored in the top quintile on “environment,” and had a positive correlation with U.S. 10-year bond yields over the previous 12 months.
Bernstein named Home Depot, Adobe, and PepsiCo as stocks with the highest pricing power and ESG scores.
Europe’s ESG funds were found to be particularly vulnerable to rising inflation, with the bank claiming that tighter constraints and regulations on sustainability made lowering inflation risk more difficult than in other regions.
Nonetheless, ING, Eni, and TotalEnergies were identified as among the region’s top ESG stocks in industries that are positively exposed to rising bond yields. Neste, Norsk Hydro, and Kingfisher were all named as top picks by Bernstein analysts for their strong pricing power and high ESG scores.
According to the bank, Asian ESG funds are better positioned than their counterparts in the United States and Europe. This is likely due to the fact that ESG investing is still in its early stages in the region, with many investors focusing on environmental issues rather than fully integrating social and governance considerations, according to the bank.
Among the bank’s high-scoring “improver” stocks in the region that are positively exposed to rising U.S. bond yields are Melco Resorts, Trip.com and Adani Ports and Special Economic Zone.
The Bitcoin fall
Bitcoin’s price dropped to a critical level after a 2-week low early Monday.
Analysts covering bitcoin are keeping a close eye on it because its price is approaching its so-called “support level.” A support level is essentially a lower price at which investors will still buy the asset.
“With this downdraft, there are oversold buy signals that make it more likely that support will be discovered,” Stockton said on Monday.
According to Stockton, the support level is $34,000, based in part on a 50% pullback on the uptrend that began off the March 2020 low. That is currently being tested, based on a variety of technical factors, including the 200-day moving average and previous lows.
Ari Wald, senior analyst at Oppenheimer, believes that $30,000 is the key level and that it will hold at current levels.
Analysts predicted earlier this month that the price could fall as low as $20,000.
“Bitcoin fell below its 200-day moving average, indicating a trend change,” Wald said. “We are not necessarily expecting a blast off and resumption of that strong fourth quarter move that bitcoin had,” when the price steadily climbed throughout the quarter to a new all-time high in the new year.
“We see a lot of similarities now to how bitcoin traded in 2018 and 2019, where it fell towards the lower end of a range, but subsequent trading was just that – a range, and upside was somewhat limited and muted,” Wald said.
“On the plus side, it appears that $40,000 has some key resistance that has limited trading for bitcoin over the last month,” he added.
A movable target
Support represents a potential area of buying pressure and is frequently based on a moving average of price, though it can also be where an asset has previously found buyers, such as the previous low on the chart.
According to Fairlead Strategies’ Stockton, a more significant breakdown would be two daily closes below the current level of $32,000 in the short term, or two weekly closes below in the intermediate to long term.
“This week’s price action will be critical, because if we don’t see a reaction to these oversold signals, there will be some risk,” she said. “The way things are set up, there should be some stabilization after today. If they continue to fall from here, we will begin to see decisive breakdowns and a lack of reaction to the oversold reading.”
Would you invest in small caps?
Recently, small caps failed due to the return to growth companies, but Jefferies is rebounding on many smaller names.
“The flattening of the curve shook many themes, as measured by ETF flows,” Jefferies small-cap analyst Steven DeSanctis told clients. “However, the backdrop for Small, Cyclicals, and Value continues to improve; estimates are rising, valuations are attractive, and the outlook for economic growth is improving.”
According to Jefferies, the picture of cyclicals is improving. Cyclical valuations have risen to the 9th percentile, earnings and sales revision ratios have reached new all-time highs for the group, and earnings growth estimates are rising.
“Even though the market is down 5% since 3/15, the rotation back to lower quality has been a thorn in the side of active investors. Active’s poor showing was exactly what happened in January, after which active rebounded sharply. “We believe this will happen again with persistent once the lower quality names finally roll over,” DeSanctis explained.
In preparation for the small-cap rebound, Jefferies screened for buy-rated stocks that have lagged since the March peak. According to the firm, these stocks are also inexpensive.
“The overall SMID-Cap size segment is down 5% since March 15, but a number of stocks have been hit much harder. Some of the stocks that have been hit have actually seen their earnings and revenue estimates rise, and they are now cheap,” DeSantics said.
Jefferies’ list includes Lithia Motors, Marriott Vacations, Bally’s Corp., and Ollie’s Bargain Outlet. Lithia Motors shares are down roughly 23% from their high, while Marriott Vacations shares are down roughly 17% from their high.
Bally’s Corp. and Ollie’s Bargain Outlet are both down roughly 30% from their 52-week highs.
Despite reporting a strong sales beat last month and raising its earnings forecast for the year, Kohl’s is down nearly 20% from its high.
In the previous quarter, excluding one-time adjustments, the company earned $1.05 per share. According to Refinitiv’s survey, this exceeded expectations of 4 cents. Kohl’s reported that store sales more than doubled during the quarter, while digital sales increased 14 percent year on year to account for 30 percent of total sales.
Kohl’s also raised its full-year adjusted earnings per share forecast from $2.45 to $2.95 to $3.80 to $4.20.
According to Jefferies, Pacira Biosciences, Sotera Health, and PGT Innovations are also expected to recover.
Jefferies believes Interactive Brokers will outperform in the second half of 2021. Despite increased retail investing activity, Interactive Brokers is down about 20% from its high. By the end of the summer, the brokerage expects to begin trading cryptocurrencies on its platform.