According to the US investment firm Seaport Global, food and farming, energy, finance, military and airlines are all industry sectors which could provide a compelling value to investors during the next year.
Seaport analysts identified the key macroeconomic themes to look for within these sectors, as well as the stocks best positioned to capitalize on them, in a research note released on Friday.
Here are ten of the firm’s top recommendations:
Food and agriculture
According to Seaport analyst Eric Larson, packaged food companies with a strong presence in emerging markets will provide superior growth. Food companies with significant EM exposure lagged behind the rest of the world in the early stages of the pandemic, but they are now on the mend.
According to Larson, they will generate more favorable revenue comparisons in the next two or three quarters when compared to developed market peers.
He cited Kellogg’s as an example, with 20-23 percent of the U.S. multinational’s total sales coming from EM regions and the company already delivering positive sales surprises. Larson noted that the company raised its dividend and resumed significant share buybacks in the first quarter, and that it is trading at a 19% discount to its peer group.
Meanwhile, agribusiness is experiencing a multi-year recovery, with strong global grain demand creating significant growth opportunities for companies throughout the supply chain.
“For the first time in 7-8 years, this benefits input suppliers, grain processors, and producers while disadvantages buyers of grain for finished products,” Larson said.
Archer-Daniels-Midland was a top pick, and Larson expects it to benefit from continued tight grain supplies, strong demand, and price volatility.
Despite the fact that automotive retail stocks have performed well over the last 18 months, Seaport analyst Glenn Chin believes they still represent good value for investors because earnings have grown faster than share prices.
According to Chin, the sector collectively trades at a 60% discount to the broader market on estimated earnings per share in 2022, despite the group’s “proven ability to maintain/grow profitability under the most dire economic scenarios.”
Earnings per share is a measure of a company’s profitability calculated by dividing total profit by the number of shares of common stock outstanding.
Asbury Automotive Group was cited as a prime example by Chin. He described the company’s five-year plan as “ambitious, but achievable,” implying more than 20% revenue and earnings growth. It also provides compelling value and is regarded as “one of the best, if not the best,” operator in the group.
With inventory of new and existing homes low across major economies and material costs expected to normalize after a period of steep inclines, Seaport believes homebuilders are a worthwhile investment.
According to Seaport analyst Mark Weintraub, valuations look appealing, particularly for KB Home, which has recently improved its competitive positioning and boosted its return profile. Seaport believes the stock, which closed Wednesday at $43.24, will reach a conservative $50 by the end of the year.
According to Weintraub, this is a “undemanding” figure when compared to Seaport’s projected book value for KB Home at the end of the next fiscal year.
According to Seaport, the balance sheets of energy infrastructure companies are well positioned to handle commodity price volatility, as free cash flow generation and debt reduction have been a key focus of capital allocation for the industry.
Targa Resources, according to analyst Sunil Sibal, is an example of this trend. The Texas-based company met its deleveraging targets in the second quarter and is on track to generate $800 million or more in free cash flow per year, according to Sibal.
“TRGP has established an integrated midstream footprint in the Permian with connectivity to the United States Gulf Coast and export markets,” said Sibal.
“Increased gas-to-oil ratios in the Permian would allow for volume growth even if crude volumes remained flat in the basin.”
According to Seaport analyst James Mitchell, markets have not priced in an interest rate hike cycle because the potential benefit to financial institutions from higher rates has not yet been reflected in earnings-per-share forecasts or share prices.
“There is no doubt that the strong trading and underwriting activity that has been driven by the uncertainty and volatility surrounding the pandemic will slow as economic uncertainty decreases,” Mitchell said.
“However, low expectations are already incorporated into consensus forecasts, and our research shows that volatility (and activity levels) can persist for years after a recession.”
Meanwhile, valuations are “not cheap but not expensive,” he added, with current premiums to five-year averages being modest.
According to Mitchell, the two big Wall Street players named as top picks are Wells Fargo and Goldman Sachs, with the former offering the best long-term profit improvement story and the latter set to be rewarded for its strategic revamp over time.
Since the onset of the coronavirus pandemic, airline stocks have taken a beating, with earnings recovery now being hampered by the spread of the delta variant. Seaport does not expect airline stocks to improve until at least mid-September or October, when cases should have receded and the variant risk should have subsided.
“From a fundamental standpoint, however, the near-term demand weakness pushes out our thesis, but it has no impact on our 1-year view of the fundamental story,” said analyst Daniel McKenzie in the report.
“We anticipate a valuation recovery once we begin to see more compelling revenue catalysts, such as the United States government finally embracing the concept of a travel passport; and the opening ofinternational corridors; and/or a positive shift in business demand.”
JetBlue and American Airlines, according to McKenzie, will be the primary beneficiaries of these trends. According to him, a partnership with American Airlines allows JetBlue to expand its network without increasing fixed costs. Meanwhile, AAL’s improved corporate and transatlantic revenue, costs, and a plan to de-risk its balance sheet have all bolstered its case.
Defense and aerospace
Seaport believes that investors are underestimating the growth of defense spending in the United States, projecting that full-year appropriations in 2022 will be far higher than President Joe Biden’s request.
According to analyst Richard Safran, Lockheed Martin is well-positioned to capitalize due to the importance of its F-35 fighter jets and the company’s growing market share. Development programs are transitioning to production, which Safran believes will improve margins.
Retail investors likes Alibaba despite the risks
Retail investors, according to Vanda Research, have disregarded obvious dangers and in the last five days picked up more Chinese-listed firms than the organization has since 2014.
According to the firm, retail investors have purchased more than $400 million in Chinese technology ADRs since last Tuesday. According to Vanda Research, retail volume increased nearly 270 percent on Alibaba and 170 percent on JD.com from the previous month.
JD.com shares jumped more than 14 percent on Tuesday, while Alibaba shares jumped more than 6 percent as the retail crowd flocked to the company. Pinduoduo gained more than 22%, while Baidu gained nearly 9%.
Ben Onatibia, senior strategist at Vanda Research, warned about retail investors’ proclivity to chase momentum trades.
“Retail investors, like Chinese ADRs, tend to load up on QQQ and SPY when stocks fall, but demand for these instruments fades as soon as prices begin to rise,” Onatibia said. “In contrast, retail investors in speculative stocks tend to be momentum chasers, where they have become the marginal price setter.”
Beijing has tightened restrictions on cross-border data flows and security, targeting industries ranging from technology to education and gaming. The Chinese government has targeted some of the country’s most powerful companies, including Didi, Alibaba, and Tencent.
Investors may have recently bought the dip after learning more about Beijing’s policies.
However, Chinese firms are still not out of the woods. The Securities and Exchange Commission is tightening its scrutiny of Chinese firms seeking to list on U.S. stock exchanges. The agency stated that it will require additional disclosures about the company’s structure as well as any risk from future Chinese government actions.
On Tuesday, SEC Chair Gary Gensler told Bloomberg News that he would strictly enforce U.S. audit rules for Chinese companies. He also warned that companies could be kicked off U.S. stock exchanges as early as 2024.
According to Vanda, retail buying peaked on Monday, when Alibaba was the most-bought stock in the United States, more than doubling the purchases of Pfizer, the second-most-bought stock on the VandaTrack list.
“The most important feature of retail ADR purchases is that they were not contrarian,” Onatibia said. “Since the regulatory crackdown began, retail investors have increased their buying on dips, supplying liquidity to institutional investors who have been exiting long positions.”
Despite Tuesday’s surge, some of these Chinese firms have outperformed others over the last five days. JD.com shares are up more than 11% since last Tuesday, while Alibaba shares are down 8% in the same time period. Didi’s stock has risen about 2% since last week, while Pinduoduo’s has risen nearly 17%. Since last Tuesday, TAL Education has increased by 1%, while Tencent Music has remained relatively stable. In that time, Baidu’s stock has risen by about 3%.
Vanda anticipates that retail demand for the Chinese-listed names will dwindle in the coming days. This is due in part to the increased attention given to other retail favorites. On Tuesday, several meme stocks, including GameStop and AMC Entertainment, skyrocketed for no apparent reason.
“Demand for vaccine manufacturers has remained strong, and semiconductor stocks such as NVDA and AMD, which are perennial retail favorites, have seen a significant increase in flows.” On yesterday’s rally, retail demand for gaming and meme stocks increased, increasing competition for scarce retail money,” added Onatibia.