Wall Street analysts are launching some of their finest ideas at the beginning of summer this weekend.
Dell, Fox, Delta, Acuity Brands, and Penn are among them.
Acuity Brands is a company that produces high-quality products.
According to Credit Suisse, Acuity is in for a “summer of catalysts.”
The firm has a high price target of $206 per share on the Street and believes the residential and commercial lighting company will benefit from several major events in the near term.
Analyst John Walsh is especially optimistic about Acuity’s upcoming investor day, which will coincide with the company’s third-quarter earnings on July 1.
Walsh recently wrote, “A market and Acuity-specific sales inflection appears on the horizon.”
Acuity’s business was “challenged” during the pandemic and hasn’t reaped the benefits of the construction boom, but that is changing, according to the company.
“As vaccines are deployed, the United States economy is beginning to accelerate, and buildings are fundamentally a GDP market,” he wrote.
In addition, the company recently acquired ams OSRAM’s North American business, which should alleviate supply constraints.
Walsh added that Acuity has demonstrated its ability to “maintain and grow its gross profit margin despite organic sales declines,” and that it is well positioned for the “end market recovery.”
This year, the company’s stock is up 47.4 percent.
According to Wells Fargo analyst Steven Cahall, this summer will be the summer of sports betting for the media and entertainment conglomerate.
The stock was recently upgraded to overweight from equal weight, and the price target was raised to $47 per share from $42.
“While the company has chosen not to get involved in the direct-to-consumer street fight, we believe sports betting could be the vehicle that the enterprise pivots towards and evolves around,” he wrote.
Cahall stated that Fox’s betting and programming assets, including the NFL, were “natural fits.”
Based on a previous agreement with gaming operator Flutter, Fox will have the opportunity to purchase a stake in gambling company FanDuel this summer.
“These upcoming catalysts are increasing investor interest in FOXA as there may be an immediate mark to market revaluation in its sports betting options,” the firm said.
In fact, he added, it’s entirely possible that Fox will become primarily a “sports-betting centric” type of company in the future.
Cahall also speculated that Fox may attempt to merge with Flutter’s US operations.
“In our opinion, if any media company can make this pivot without destroying cultural identities, it is FOX,” Cahall said.
This year, the stock is up 29.2 percent.
Summer travel has arrived, and Delta is leading the way, according to Jefferies analyst Sheila Kahyaoglu in a note to investors.
Kahyaoglu recently upgraded the stock from hold to buy, claiming that the airline is “best positioned for [the] next stage of recovery.”
According to the firm, web traffic trends for domestic capacity are returning to normal, and the focus will now shift to corporate and international.
“Since early February, web interest in Delta.com and other US airline websites has gradually increased, with the most recent week showing DAL 6% above the pre-COVID normalized level,” she wrote.
Delta, according to Kahyaoglu, is poised to take share due to its strong domestic footprint with small and medium-sized businesses and overexposure to Europe.
“Domestic corporate travel is currently trending at 30% of normalized levels,” she added.
Meanwhile, Europe will be the first overseas market open to American travelers, with Delta playing a key role.
Delta is thus well positioned to “drive an accelerated recovery versus peer network carriers,” according to the company.
Delta’s stock is up 11.8 percent this year.
These are the risky tech stocks
Take a look at five of Trivariate’s most risky technology stocks.
Apple is among the riskiest stocks, according to Trivariate. According to the research firm, Apple is one of the stocks with the most negative correlation to inflation. According to Trivariate, if bond yields rise or inflation fears persist, Apple’s stock will underperform the market.
Nvidia is also on the list of high-risk tech stocks. Trivariate discovered that the semiconductor stock has one of the most asymmetric betas, which means that it is consistently more volatile than the broader market during market pullbacks when compared to typical times.
Among the riskiest technology stocks, according to Trivariate, are payments company Square, cloud communications platform Twilio, and semiconductor manufacturer Microchip Technology.
The market after the Fed’s shift
Last week, the markets certainly acted as if there were a consequence shift, with some of the most trendy trades going out of vogue fast, months of bond market bets unwinding in days, and the reliable rotating dance among stock styles not enough to save the tape from a 2% decrease.
The yield curve savagely flattened, with 10- and 30-year yields shuttling lower as short-term rates surged, textbook patterns of a market raising the probability of future rate hikes while lowering inflation expectations. Commodities plummeted, value and cyclical stocks gave up large portions of their eight-month gains, and the dollar soared.
All of this was precipitated by a handful of Fed members revising their forecast for the first rate hike, with the majority still expecting none until 2023. Chair Jerome Powell’s stance hasn’t changed, and it appears that most of those getting antsy to raise rates to combat inflation are likely regional Fed bank presidents, who don’t all vote every year.
To put it another way, it appears to be an exaggerated positioning shock. It’s difficult to tell how crowded a party is until a smoke detector goes off and revelers rush from the basement and upstairs bedrooms; similarly, markets smoke out over-concentrated investment bets.
According to Bespoke Investment Group, while the market reaction is in line with the Fed’s incremental shift in its outlook, “the size is excessive, driven by extremely unbalanced positioning on the Treasury curve and in breakevens, large speculator longs in commodities, particularly grains, and a technical flush higher in the dollar.”
Also worth noting: Inflation “breakevens” – the market-implied pricing of forward inflation – fell with copper and the dollar’s ramp, all of which will serve to muffle the inflation that some Fed officials are now concerned about. In other words, the market has done a lot of the Fed’s work without any policy changes.
And be on the lookout for Fed policymakers to begin hitting the speaking and media circuits to provide more soothing context for the Fed’s statement and forecasts last week, emphasizing how far the economy remains from the Fed’s aggressive employment goals and the orderly process of reduced bond buying that will take place long before overnight rates change. In fact, New York Fed President John Williams will make a public appearance on Monday.
According to the Atlanta Fed’s GDP Now model, the U.S. economy could exceed 10% real annualized growth in the quarter that ends in less than two weeks. According to FactSet, the S&P 500 expected earnings growth continues to rise, with a rise of more than 34% for the entire year of 2021.
The S&P 500 forward price/earnings multiple is now just above 21; it was around 23 five months ago, when the index was 9% lower. The forward P/E ratio hit a low of 20.7 just before the market began its massive cyclical-led rally on Oct. 30.
Not cheap by any means, but less expensive than it has been for the majority of the last 15 months, and the index’s dividend yield now slightly outperforms the 10-year Treasury yield at 1.45 percent. For good measure, companies have announced new share buybacks at a rate close to $1 trillion per year in the last three months, near the upper end of the pre-2020 range (excluding the immediate aftermath of the 2017 corporate tax cut).
Certainly, peak profit acceleration has passed, and margin pressure may begin to bite in some industries. Nonetheless, whatever rethinking occurred among traders last week, the main concrete inputs to corporate values remain largely unchanged.
On a broader scale, financial conditions remain lavishly loose, implying that liquidity and credit conditions are about as accommodating as they have been for the past two decades.
Of course, this means they can’t get any better. But it’s a long way from here to any serious financial problems.
The tactical configuration
Even before last week’s vicious thumping of cyclical “reflation” stocks, which was not nearly offset by a firming in stable growth names, the tape had lost momentum and a growing number of stocks were falling by the wayside – a subtle shift in character from the broadly inclusive rally that lasted until mid-April.
Last week’s events made things less subtle, eventually leading to a more widespread sell-off on Friday, when roughly half of all S&P 500 stocks were down at least 10% from their 52-week highs, despite the index itself being down less than 3% from its peak.
While this is a minor drop in the S&P 500, the index still closed below its 50-day moving average on Friday, which was close due to the market being flat for the previous two months.
A drop below a rising 50-day average (which occurred briefly during the February pullback) is often a good time to buy in a bull market, even if such purchases do not pay off right away.
Importantly, many cyclical and value sectors have become rapidly oversold, despite the fact that these sectors are still in longer-term uptrends and continue to lead the market. Despite the fact that the Russell 1000 Value Index fell 4% last week and is now 5.4 percent below its high, while the counterpart growth index is down less than 1%, the value benchmark is still outperforming growth by more than three percentage points this year.
According to Keith Lerner, market strategist at Truist Advisory Services, only 28% of stocks in the S&P 500 Pure Value Index (tracked by an ETF under the ticker RPV) are above their 50-day average, indicating an oversold reading similar to the one seen last fall before the value run got going.
Of course, oversold does not imply ready for a rebound. This test of the bulls’ resolve is likely to continue, as seasonal factors and signs of erratic vibrations have emerged.
Friday was the June “quadruple witching” expiration, a big one that wiped out huge swaths of options bets and has historically led to even more choppy trading. According to McMillan Analysis, the S&P 500 has been down 80 percent of the time in the week following June options expiration since 1990, averaging a loss of 0.9 percent.
More broadly, Ned Davis Research’s cycle composite, which combines annual, presidential-election, and decennial patterns, indicates a proclivity for rougher air in mid-July. Through Tuesday, the S&P 500 had roughly followed the historical trend.
The CBOE Volatility Index finished above 20 on Friday, rather than leaking lower as it usually does on a Friday in a steady market. The typical Monday increase in the VIX could push it above the price of the July VIX futures contract, which is frequently associated with shaky market conditions in the short term.
All of these characteristics are consistent with a market undergoing a benign and brief “stealth correction” on its way higher, but also with a failing uptrend that is trapping complacent investors and requires a deeper correction to sort itself out.
However, with investor positioning now cleaner and clusters of overconfidence dissipating, much of what has changed in the last week could be for the better in the long run.