UBS economists see a recession coming in 2023. Here are the 37 stocks that will lead the market recovery in the first half of next year, the bank says.
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.
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