These ‘quality cyclical’ stocks have sold off too much and are due for a bounce, UBS says
The S & P 500 came off its lows for the year after last week’s big bounce, and UBS has highlighted several stocks that could be good to own as the market continues to recover. The broad-market index slid slightly on Tuesday. As signs of overblown inflation fear and peak inflation have begun to appear, investors are unsure about the rally’s viability. In a Tuesday note, UBS said the S & P 500 is oversold by 4 percentage points for the year on fears of a recession induced by the Federal Reserve. UBS advised investors to look for quality stocks that are cyclical in order to take advantage of post-selloff opportunities. The note stated that the greatest headwind for equities was tightening financial conditions (-8ppts), but peak Fed hawkishness, falling bond vol and other factors should help to mitigate any further downside. Parker stated that “our models suggest that cyclicals against defensives have outshot macro drivers 10% over the previous 3mo. The largest amount since 2012 and providing a buffer,” Parker continued. The historical trend for cyclicals to outperform defensives has been 3%-5% in the 3-6 months following extreme dislocations. UBS screened for 40 cyclical quality stocks in the S & P 1500 that the firm says have undershot fundamentals based on its models. Parker said the screen has underperformed the S & P 500 by 9% since the second quarter, and it has an implied upside of 11% to the firm’s models’ fair value. It does not contain sell-rated stocks. These are 10 stocks. Source: UBS Under Armour, which is smaller than the other companies in market capital, ranks 99th on UBS’s cyclical ranking. The stock has fallen about half a percent over the past year. Bath & Body Works is right behind it, in the 98th percentile in the cyclical ranking. This stock is down 41% since 2022. T. Rowe price is in the 99th percentile of the quality rankings. The shares are down 35% over the past year. Align Technology has lost 57% while Applied Materials is down 25%. Simon Property Group, Avis Group & American Financial Group – Nucor Corporation and Gartner also appear on the screen.