- Keith Parker, UBS' chief US equity strategist, has identified a number of catalysts that have been swinging the markets to wins and losses in recent weeks.
- Parker and his team remain bullish on the stock market despite the risks and uncertainties ahead.
- They mapped out key themes that they believe will offer investors attractive upside and limited downside.
- The team screened the equity universe for 23 stocks exposed to such themes and incorporated UBS analysts' views into the stocks that made the cut.
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A lot of catalysts are moving the stock market these days.
From the potential passage of another stimulus bill, election-related uncertainty, and another surge in COVID-19 cases to news of a vaccine, an unexpected rise in unemployment, and pent-up consumer savings, these headwinds and tailwinds are what UBS strategist Keith Parker calls "cross-currents."
"With all the catalysts on the horizon, we saw risks tilted to the downside," Parker told Business Insider in an interview. "We've seen the market sell off as a lot of the tailwinds that we saw from the market in August turned into either net headwinds or neutral."
However, Parker and his team remain bullish despite the recent sell-offs and the many risks ahead.
"With continued recovery, low rates, and continued rising earnings through 2022, and 'getting back to normal' at the end of next year," he said, "looking ahead to 2022, we do still see significant gains on the horizon for the equity market as and when we move through these catalysts."
Their positive sentiment on the stock market is anchored towards a number of themes that they believe will offer investors an attractive upside and limited downside, or "asymmetry" in the parlance of investing.
One of the themes Parker is watching closely is the production rebound, which is based on declines in inventory and inventory/sales ratios.
"We saw the record collapsing in inventories in the US relative to GDP despite such weak demand in the second quarter, so inventory restocking with demand recovering in Q3 and beyond, we should see a very healthy rebound in production," he explained. "So those companies and industries where we've seen inventory decline more than sales offer an attractive reward versus the risk."
Parker and his team also scanned for companies with pricing and margin momentum. They looked at companies' sensitivity to vaccine news and election risk in terms of potential tax impacts as well as sensitivities to changes in election odds.
They examined other themes such as a company's yield based on free cash flow, dividends, estimated 2022 earnings per share, as well as a company's growth based on level and change in next-twelve-month and 3-5 year EPS growth.
After filtering stocks in the mid-to-large-cap S&P 900 index based on such themes, Parker and his team took the stocks that screened in the top third and asked UBS analysts to present their highest-conviction stock picks.
"So it's a combination of a top-down and also bottom-up insights," Parker said. "Given the risk versus the reward backdrop, we think these stocks offer a great opportunity."
The list of 23 stocks, along with their tickers, sectors, and analyst commentaries, are listed below.
Sector: Consumer discretionary
Price Target: $4,000
Commentary: "We continue to believe that COVID-19 will have a profound impact on consumer/enterprise behavior over the medium-to-long term," said analyst Eric J. Sheridan. "In our view, Amazon's business mix positions the company to be a beneficiary of sustained long-term behaviors that are likely pulling forward prior multi-year industry adoption curves in eCommerce, cloud computing, media consumption, digital ad & AI voice assistants."
2. Concho Resources
Price Target: $99
Commentary: "CXO is a top pick given its scale, acreage position, management expertise and expectation for continued capital efficiency as it moves to a stabilized pace of development. Coupled with a strong balance sheet, CXO is well positioned to continue to generate FCF in current environment," said analyst Lloyd Byrne.
3. Constellation Brands
Sector: Consumer Staples
Price Target: $208
Commentary: "We believe STZ's shares are undervalued at 20x UBSe NTM EPS. STZ's near-term event path includes accelerating shipment through F2H and closure of wine transaction," said analyst Sean King. "We believe the Beer growth and margin story remains underappreciated and view the current valuation as a buying opportunity."
4. Deckers Outdoor Corporation
Sector: Consumer discretionary
Price Target: $260
Commentary: "We think Deckers' sales and EPS outlook justify a higher valuation. Its high-growth brand HOKA should drive a +6% 5-year consolidated top-line CAGR," said analyst Jay Sole. "We anticipate a P/E re-rating to 21x. This multiple expansion along with a 12% 5-year EPS CAGR drive 24% PT upside. We see a 2:1 upside/downside skew and rate DECK Buy."
5. Electronic Arts
Sector: Communication services
Price Target: $170
Commentary: "Beyond the current environment, we remain constructive on broader gaming industry themes: increased engagement/monetization, cross-platform play & subscription/cloud-based models," said analyst Sheridan.
"In many ways, the "shelter in place" dynamic has accelerated these themes as individuals & households dedicate increased media consumption time toward gaming content. Against the backdrop of solid topline momentum and improving margins, we see a compelling risk/reward in EA."
Price Target: $203
Commentary: "GNRC provides a relatively uniquely diversified opportunity to which investors can gain exposure to the rapidly growing solar + storage market w/ underlying earnings stability from GNRC's core business of recession resilient home standby power," said analyst Jon Windham.
7. Global Payments
Price Target: $247
Commentary: "We believe that Global Payments will grow faster than its respective industry growth rates, due to its mix shift of revenue toward faster growing tech-enabled products (integrated, software-owned assets, ecommerce/omnichannel); international exposure in faster growing geographies; and exposure to attractive industry verticals," said analyst Eric Wasserstrom.
"Additionally, we believe the company will achieve targeted revenue and cost synergies. As a consequence of these factors, we believe Global Payments will benefit from strong revenue growth of 8-9% and ~160 bps of annual adj. operating margin expansion, driving a ~15% 5- year adj. EPS CAGR and enabling multiple expansion," he said.
8. HCA Healthcare
Sector: Health care
Price Target: $150
Commentary: "HCA's pre-COVID results outpaced investor expectations and the company remains levered to a recovery w/ one of the leading ASC platforms," said analyst Whit Mayo. "HCA's LT capital deployment strategy remains in-tact and we expect HCA's significant FCF generation to resume post-COVID. We peg the company exiting 2020 w/ ~$2b more cash vs. prior estimates, which reduces the forward multiple by 0.3x."
9. IQVIA Holdings
Sector: Health care
Price Target: $204
Commentary: "We expect the stock to outperform the market. Conviction in IQV's data-driven patient recruitment strategy plus a favorable industry backdrop support our above-consensus estimates, which together with multiple expansion can enable ~30% stock appreciation in the next 12 months," said analyst Dan Brennan.
Price Target: $68
Commentary: "Key drivers of our Buy rating: 1) acceleration in organic growth for MT; 2) ongoing margin improvement in IP and CCT segments; and 3) increased appetite/ability to deploy capital," said analyst Damian Karas.
"We expect new Friction OE platform ramps to drive MSD-DD organic growth in MT over the medium term, above ~LSD levels during the last two years (pre-COVID) of declining global auto production. We also believe the company has just scratched the surface of its margin self-improvement "war chest," he said.
11. Kinder Morgan
Price Target: $22
Commentary: "KMI currently trades at an 8% dividend yield, with an implied yield of 8.8% when taking into account our estimated 9.5% dividend raise in 1Q21. This compares to the S&P yield of less than 2%," said analyst Shneur Gershuni.
"We estimate KMI will be FCF positive post dividends in 2021 as capex should be down meaningfully YoY. Further KMI has a large natural gas exposure, which we believe is more stable earnings vs. crude in this environment. While CO2 and Refined Products demand trends have bottomed and ticking back up," he said.
12. Knight Swift Transportation Holdings
Price Target: $53
Commentary: "We believe the current tightness in the truckload market in combination with low retailer inventory levels provides clear visibility to a favorable outlook for the truckload market and KNX into 2021," said Thomas Wadewitz.
"We expect the strength in truckload freight and backdrop of improving pricing to support upside EPS performance from KNX in 2H20 and rising EPS expectations looking forward. We expect strong EPS growth to support attractive upside for KNX stock even as valuation may moderate," he said.
13. Lockheed Martin
Price Target: $475
Commentary: "Lockheed has consistently been a top pick in our space since we launched coverage in 2018 and is a top pick for 2020 given backlog sales coverage, pace of organic growth, management execution, and expected strong bookings this year and into 2021," said analyst Myles Walton.
"Though the company initially revised sales for '20 modestly downward on COVID-19 impacts (confined just to the Aero segment), the company navigated COVID-19 impacts diligently and raised their outlook on the back of 2Q," he said. "We still see opportunity in the topline remaining in Aero and MFC given the healthy cushion in their sales. We view the current valuation as compelling (~6% FCF yield) and continued quality of their earnings stream as reasons for attraction to the name."
Sector: Consumer discretionary
Price Target: $195
Commentary: "We believe LOW's risk-reward is compelling at current levels. The company is likely to be a prime beneficiary of wallet share shifts to home for the foreseeable future," said analyst Michael Lasser.
"Plus, while LOW's EBIT margin is likely to expand nicely in the near-term, it's still likely to end FY'21 with a margin that's 300+ bps below that of HD's. This shows there is ample room for its margin to improve form here," he said. "Despite these tailwinds, the stock is still trading at just 17.5x our CY'21 EPS estimate, which is 4x below HD's multiple."
15. Morgan Stanley
Price Target: $57
Commentary: "Shares likely to re-rate on growing WM earnings: We believe MS's current valuation does not reflect its more attractive mix vs peers," said analyst Brennan Hawken.
"Currently, just under half of MS's earnings are generated by wealth and asset management, and that will expand to about 55-60% of earnings over the next several years. Therefore, as the higher multiple earnings grow, we expect MS's multiple will expand concurrently," he said.
16. NextEra Energy
Price Target: $312
Commentary: "NEE is the best in class regulated utility operator in the most constructive regulatory jurisdiction in North America and the success in the Gulf Power integration demonstrates the capability to apply the FPL operational model to acquired utilities," said analyst Daniel Ford.
"At NEER, we believe that the 20% renewable market share is levered to significant secular growth trends of electrification and de-carbonization of the grid, as well as de-methanization of the fossil fuel stream," he said.
17. NVIDIA Corp
Price Target: $625
Commentary: "Gaming is driving most of the upside and continues to be supported by a virtual cycle of new technology and content. Core NVDA data center (DC) is growing modestly (6-7% Q/Q, in-line) even as it rides an Ampere product cycle that carries MUCH higher ASPs given its value proposition," said analyst Timothy Arcuri.
"Even though some possible digestion from hyperscalers and additional actions beyond Huawei must be considered (UBSe ~20-25% of core NVDA DC is China hyperscalers), the scale in which NVDA is playing is simply dramatically larger than in years past (data center vs server)," he said. "In addition, MLNX & ARM acquisitions provide strength to NVDA's product cycle roadmap which we believe is still far and away the most powerful product cycle in semis."
Sector: Consumer discretionary
Price Target: $117
Commentary: "Our price target of $117 is based on the PV of upper end of ~15-16x '22E EPS in line with PII's historical 3- and 5-year average valuation multiple," said analyst Robin Farley. "We are discounting at 15% annually. We expect +3% revenue growth in 2020, above guide of flat to -2%, while we expect 2021 sales up slightly and 2022 up +6% YOY."
19. Quanta Services
Price Target: $61
Commentary: "We expect Quanta to resume growth in 2021 after 2020's growth is challenged by the COVID-19 shutdowns and the impact of lower oil prices. For 2021, we think PWR can grow overall revenues by 6% and EPS by 22% while generating ~$400m of cash (~75% of net income)," said analyst Steven Fisher.
20. S&P Global
Price Target: $418
Commentary: "We upgraded SPGI to Buy from Neutral in May 2019 on the back of UBS Evidence Lab data that suggested upside from new Chinese opportunities will materialize much sooner than the three-to-five years the market is currently pricing in," said analyst Alex Kramm.
"While issuance has been robust YTD, and growth will likely be challenged in 2H20, we expect the combination of low rates, corporate debt refinancing needs, and Fed programs to provide support. Non-Ratings segments should also see mid-single-digit growth," he said. "While uncertainty remains, we are constructive on the stock as we think SPGI's diversified business could weather near-term challenges, and upside opportunities (China/ESG) provide optionality."
Price Target: $511
Commentary: "ServiceNow's focus on broad adoption within large enterprise customers positions the company to deliver both strong revenue growth through continued upsell and new logo adds, and sustain high sales efficiency and gradual free cash flow margin gains," said analyst Jennifer Lowe.
"The market values software stocks on a combination of growth and profits, and ServiceNow leads on both fronts, yet this combo looks underpriced, as the current 15.8x EV/CY21E sales multiple lags the 18.1x implied by our EV/Sales vs. rev. growth regression valuation model," she said.
Sector: Health care
Price Target: $450
Commentary: "We have a Buy rating on TFX given its leverage to necessary procedures and also elective ones like Urolift for enlarged prostate that should return quickly given it is a combination of a) good therapy; b) an outpatient procedure, c) can be done quickly, and d) has good reimbursement. We see TFX as a good procedural recovery play," said analyst Matt Taylor. "Looking ahead, key value drivers include Urolift, Interventional Access, Manta, EZ Plas, and growth in Asia."
23. The Hartford
Price Target: $64
Commentary: "We believe HIG is a meaningful beneficiary of the "hard" commercial lines pricing environment which could drive better than expected underwriting margin expansion. Moreover, while HIG's significant exposure to works comp insurance is a headwind to margin expansion, as workers comp insurance pricing improves, the headwind could dissipate quicker than expected," said analyst Brian Meredith.
"We also believe the stock's significant discount to peers is due in part to concern over exposure to business interruption (BI) claims. As we continue to get more clarity on BI and court decisions go in favor of the P&C industry, we would expect the overhang to diminish and the shares re-rate higher, closer to peers," he said.
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