- Defensive stocks will outperform at the start of 2023, UBS strategists say.
- But the focus will shift to cyclicals sometime next year, they say.
- The bank shared in a recent note 37 "early cyclical" stocks that will lead that shift.
The US economy will enter into a recession next year, economists at UBS believe.
Therefore, defensive stocks — those that tend to perform well in any economic environment, as opposed to cyclical stocks, which perform better when the economy is in good shape — will outperform in the first quarter, equity strategists at the bank said in a note to clients last week.
But as the economic picture improves, cyclicals will start to bounce back, they said. Market focus on the shift cyclical outperformance will likely intensify in the second quarter, the strategists said, a recovery should start to priced sometime by the middle of 2023.
To get an idea of stocks that will be at the forefront of the recovery, the strategists created an "early cyclical" screen with companies whose historical performance meets the criteria below.
"We only include stocks which rank in the top 30th [percentile] of our proprietary cyclical ranking score," said Keith Parker, the bank's chief US equity strategists and the lead author of the note. "We then only include stocks whose 6m relative returns leads the 6m change in our cyclicals vs defensive screen by at least 1 month and with a correlation > 25%. We also include cyclical stocks who have on average outperformed by more than 3% one month prior to cyclical vs defensive turning points since 2010."
Companies on the list with market caps below $5 billion include: IPG Photonics Corporation (IPGP); Watts Water Technologies (WTS); PVH Corp (PVH); Onto Innovation (ONTO); PotlatchDeltic Corporation (PCH); Kohl's Corporation (KSS); American Eagle Outfitters (AEO); Worthington Industries (WOR); LCI Industries (LCII); Urban Outfitters (URBN); Lindsay Corporation (LNN); Apollo Medical Holdings (AMEH); Monarch Casino & Resort (MCRI); Alexander & Baldwin (ALEX); PennyMac Mortgage Investment Trust (PMT); Patrick Industries (PATK); and Stewart Information Services Corporation (STC).
Stocks with larger market capitalizations tend to outperform smaller cap stocks through the first 3/4 of a recession, UBS said in the note. The same is true for cyclicals vs. defensives.
The 20 on the list with market caps above $5 billion are listed below in ascending order of their market caps.
1. Gap
Ticker: GPS
Market cap: $5.3 billion
Sub-industry: Apparel Retail
Days lead ahead of cyclical vs defensive shift: 23
Correlation of lead: 35%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 4%
Source: UBS
2. Newell Brands
Ticker: NWL
Market cap: $5.4 billion
Sub-industry: Housewares & Specialties
Days lead ahead of cyclical vs defensive shift: 66
Correlation of lead: 20%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -4%
Source: UBS
3. Generac Holdings
Ticker: GNRC
Market cap: $6.7 billion
Sub-industry: Electrical Components & Equipment
Days lead ahead of cyclical vs defensive shift: 56
Correlation of lead: 28%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -6%
Source: UBS
4. Amkor Technology
Ticker: AMKR
Market cap: $6.7 billion
Sub-industry: Semiconductor Equipment
Days lead ahead of cyclical vs defensive shift: 19
Correlation of lead: 39%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -5%
Source: UBS
5. DXC Technology
Ticker: DXC
Market cap: $6.8 billion
Sub-industry: IT Consulting & Other Services
Days lead ahead of cyclical vs defensive shift: 26
Correlation of lead: 46%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -2%
Source: UBS
6. Capri Holdings
Ticker: CPRI
Market cap: $6.8 billion
Sub-industry: Apparel Accessories & Luxury Goods
Days lead ahead of cyclical vs defensive shift: 29
Correlation of lead: 48%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 12%
Source: UBS
7. Cleveland-Cliffs
Ticker: CLF
Market cap: $8.1 billion
Sub-industry: Steel
Days lead ahead of cyclical vs defensive shift: 3
Correlation of lead: 36%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 5%
Source: UBS
8. Lamar Advertising Company
Ticker: LAMR
Market cap: $8.6 billion
Sub-industry: Specialized REITs
Days lead ahead of cyclical vs defensive shift: 19
Correlation of lead: 32%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -5%
Source: UBS
9. AGCO Corporation
Ticker: AGCO
Market cap: $9.7 billion
Sub-industry: Agricultural & Farm Machinery
Days lead ahead of cyclical vs defensive shift: 27
Correlation of lead: 36%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -4%
Source: UBS
10. TD SYNNEX
Ticker: SNX
Market cap: $9.8 billion
Sub-industry: Technology Distributors
Days lead ahead of cyclical vs defensive shift: 25
Correlation of lead: 36%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 1%
Source: UBS
11. Qorvo
Ticker: QRVO
Market cap: $9.8 billion
Sub-industry: Semiconductors
Days lead ahead of cyclical vs defensive shift: 66
Correlation of lead: 18%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 6%
Source: UBS
12. Xylem
Ticker: XYL
Market cap: $20.4 billion
Sub-industry: Industrial Machinery
Days lead ahead of cyclical vs defensive shift: 53
Correlation of lead: 32%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -1%
Source: UBS
13. Gartner
Ticker: IT
Market cap: $27.1 billion
Sub-industry: IT Consulting & Other Services
Days lead ahead of cyclical vs defensive shift: 0
Correlation of lead: -5%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 3%
Source: UBS
14. Simon Property Group
Ticker: SPG
Market cap: $39.1 billion
Sub-industry: Retail REITs
Days lead ahead of cyclical vs defensive shift: 66
Correlation of lead: -21%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 4%
Source: UBS
15. Microchip Technology Incorporated
Ticker: MCHP
Market cap: $42.1 billion
Sub-industry: Semiconductors
Days lead ahead of cyclical vs defensive shift: 42
Correlation of lead: 42%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -1%
Source: UBS
16. Freeport-McMoRan
Ticker: FCX
Market cap: $54.3 billion
Sub-industry: Copper
Days lead ahead of cyclical vs defensive shift: 19
Correlation of lead: 57%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -4%
Source: UBS
17. Lam Research
Ticker: LRCX
Market cap: $62.9 billion
Sub-industry: Semiconductor Equipment
Days lead ahead of cyclical vs defensive shift: 42
Correlation of lead: 29%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -2%
Source: UBS
18. Applied Materials
Ticker: AMAT
Market cap: $92.6 billion
Sub-industry: Semiconductor Equipment
Days lead ahead of cyclical vs defensive shift: 59
Correlation of lead: 45%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -6%
Source: UBS
19. Intuit
Ticker: INTU
Market cap: $111.5 billion
Sub-industry: Application Software
Days lead ahead of cyclical vs defensive shift: 41
Correlation of lead: 2%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 4%
Source: UBS
Ticker: INTU
Market cap: $111.5 billion
Sub-industry: Application Software
Days lead ahead of cyclical vs defensive shift: 41
Correlation of lead: 2%
Avg 1m return prior to cyclical vs defensive turning points since 2010: 4%
Source: UBS
20. Deere & Company
Ticker: DE
Market cap: $132 billion
Sub-industry: Agricultural & Farm Machinery
Days lead ahead of cyclical vs defensive shift: 38
Correlation of lead: 40%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -2%
Source: UBS
Ticker: DE
Market cap: $132 billion
Sub-industry: Agricultural & Farm Machinery
Days lead ahead of cyclical vs defensive shift: 38
Correlation of lead: 40%
Avg 1m return prior to cyclical vs defensive turning points since 2010: -2%
Source: UBS
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