UBS reveals its highest conviction stock picks for the rest of 2022
Jul. 31, 2022 2:57 PM ETDuPont de Nemours, Inc. (DD), BAWMT, AAPL, SRE, LNG, XLE, XLV, XLB, XLF, XLI, XLK, XLP, XLY, BKNG, MCD, BAC, VRTX, CAT, MU, MMM, ALL, MAT, ALK, SBAC, ORLY, BPOP, NDAQ, SPB, LH, STLD, AMP, EQR, OC, TMUS, RGA, TEL, V, GPK, SAIA, GNRC, MSCI, BERY, ACHC, IQV, FOXA, CRWD, HLT, NOMD, XLRE, XLC, MYTE, ONONBy: Kim Khan, SA News Editor56 Comments
UBS surveyed its analysts for stocks with attractive upside vs. downside in volatile markets.
"We've focused on stocks where we believe our analysts have a truly differentiated view vs. consensus, and where we have interesting or proprietary data sources (from UBS Evidence Lab or elsewhere)," strategist Keith Parker wrote in a note. "From a strategy perspective, we've found that risk/reward is attractive when this much recession risk is priced (>80pctl) but as we move later cycle, avoiding the biggest underperformers becomes even more important for portfolio returns."
"Indeed, our analysts have identified opportunities with attractive upside vs downside skew in these volatile markets."
The top conviction picks by sector are:
- Basic Materials (XLB)
- DuPont (NYSE:DD), price target $96: "We believe the market is not currently appreciating the significant shift in DuPont's exposure and growth following a series of strategic actions."
- Steel Dynamics (STLD), $105: "We assess steel prices should find support around pre-Russia/Ukraine levels of U $900-1,000/st into 2H22 (vs US$1,300/st spot), due to elevated iron ore/met coal prices, still well-above historical levels."
- Berry Global (BERY), $78: "We believe lower leverage, stable/growing earnings, increasing circular feedstock mix, and a shift in cash return policy (more returns and growth investments) as factors that should shift investor sentiment more positive, pushing the stock higher."
- Graphics Packaging (GPK), $26: "Our Buy rating on GPK reflects our view that the boxboard market is underappreciated following years of stagnant growth and limited pricing power."
- Capital Goods & Industrials (XLI)
- Boeing (NYSE:BA), $263: "We believe BA is now a show-me story until confidence rebuilds which we think will begin with 787 deliveries restarting, consistently higher 737 deliveries and resumption of 737MAX operations/deliveries in China."
- Saia (SAIA), $240: "In our view, SAIA stock already reflects the expectation of a significant freight downturn considering SAIA stock is off 45% in 2022 (vs the S&P 500 -18%). We believe the current valuation (14x on our 2022 EPS) is attractive."
- MSCI (MSCI), $564: "While valuation remains elevated by historical standards, we continue to point to MSCI’s best-in-class earnings growth and potential upside opportunities, specifically ESG and Climate, which should command a premium multiple."
- 3M (MMM), $118: "While 3M could be considered undervalued on the core business (organic growth/margins), we believe the stock still has downside risk due to the large uncertainty around ongoing/potential litigation."
- TE Connectivity (TEL), $165: "The post-Covid economy has accelerated towards TEL behind a heightened focus on building resiliency and investments in connectivity. As these trends continue to take share of capex wallets, we see a sustainable uplift in market outgrowth vs historical levels - positive for both EPS &valuation."
- Caterpillar (CAT), $250: "We think the narrative around the stock has been around the disappointing margins during the post-COVID upcycle and CAT missing an opportunity to capitalize on strong demand."
- Alaska Air (ALK), $80: "We've maintained ALK as our top pick in US airlines in 2022 given they navigated Covid particularly well by avoiding shareholder dilution and shoring up their balance sheet/improving net debt."
- Spectrum Brands (SPB), $119: "The bull case for Spectrum Brands has always been predicated on unlocking value in an underappreciated asset, and while stock performance from here will hinge on deal timing, we believe the HHI divestiture and potential strategic actions for HPC are meaningful steps towards unlocking value."
- Nomad Foods (NOMD), $26: "Given the inflationary environment, we believe PL will need to take multiple rounds of price as well or will face significant profit pressure."
- Walmart (WMT), $165: "We believe it's now approaching an inflection point, where it can leverage technology to reduce expenses and speed up its productivity loop. It's reached a critical mass in online grocery, which should give it an edge as consumers become more open to that channel post Covid-19."
- Hilton (HLT), $157: "We believe HLT will outperform MAR because of better unit growth and we also see a catalyst for the lodging space with the return of business travel, as the incremental improvement in occupancy recovery now is likely to be made up of more high-margin business travel vs leisure."
- Owens Corning (OC), $137: "We model OC generating over $1bn of free cash flow/yr through 2024 and buying back ~13% of its shares."
- Mattel (MAT), $36: "Mattel's target of 16-17% profit margin for '23 is well within reach, in our view, given the accretive growth from key owned brands, and acceleration in growth from franchise brands."
- McDonald's (MCD), $290: "We view elevated US sss strength as sustainable and continue to see an international sales recovery ahead, w/ market share gains likely in most key markets globally."
- O'Reilly Automotive (ORLY), $750: "Sector trends should hold up fine in a recessionary backdrop while it also has solid pricing power should inflation persist for longer. "
- On Holding (ONON), $39: "The market sees On as mainly a running shoe brand and doesn’t fully appreciate the brand's potential to address a larger market."
- Energy (XLE)
- Generac Holdings (GNRC), $450: "Dominant market share (~80%) and strong demand for home stand-by power have insulated already high residential product margins from inflationary cost pressures."
- Sempra Energy (SRE), $198: "As the clean energy transition accelerates, we see the potential for growth at Sempra to accelerate which would be upside to our base case."
- Cheniere (LNG), $184: "We believe the market does not appreciate how liquefaction capacity is financed at the project level (& IG rated)."
- Popular (BPOP), $122: "BPOP should outperform with low provision rates and a massive reserve just as mainland banks bolster reserves and wrestle with deposit runoff."
- Bank of America (BAC), $64: "We view BAC as both a cyclical and a secular winner, well positioned to deliver peer leading returns in the higher rate environment, if the economic expansion cycle continues; while also offering downside protection, should the economic conditions deteriorate."
- Ameriprise Financial (AMP), $350: If "freed up capital is deployed to grow AWM, we believe it strengthens the case for multiple expansion."
- Nasdaq (NDAQ), $213: "The company's strategic pivot to allocate capital to its fastest growing businesses (Investment Intelligence and Market Technology) has been well-received and has driven double-digit non-transaction organic growth in recent quarters (+11% on average between 1Q19-1Q22)."
- Allstate (ALL), $160: "We believe rate increases in ALL's personal auto business will begin to offset loss trend as frequency comps get easier in 2Q22 and rate starts to catch up to elevated severity trends."
- Reinsurance Group of America (RGA), $149: "We believe RGA's shares continue to overly reflect mortality risk for COVID and we view RGA's discount as unwarranted given the improved underwriting commentary in 1Q22 and multiple potential sources of near-term earnings upside."
- Equity Residential (EQR), $104: "With every one of its markets seeing higher rental rates compared to 2019 levels, we believe EQR can see that momentum continue well past the peak Spring leasing season."
- Healthcare (XLV)
- Vertex Pharma (VRTX), $321: "At current levels, the market is giving VRTX no credit for its pipeline vs our conservative $58/sh estimate."
- Acadia Healthcare (ACHC), $86: "We model each pillar of the company's growth strategy and see nearly $170 mn of balanced EBITDA contribution, supporting 10%+ EBITDA growth over the next five years, even when considering potential pressure from Medicaid reimbursement."
- Laboratory Corporation of America (LH), $326: "We believe LH's multiple should expand as the impact of COVID diminishes and the health of the base business emerges."
- IQVIA (IQV), $290: "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 ~45% stock appreciation in the next 12 months."
- T-Mobile US (TMUS), $175: "We see meaningful upside to shares as EBITDA growth accelerates, FCF ramps and a multi-year buyback program commences."
- SBA Communications (SBAC), $400: "As the pure-play public tower operator, we believe the company is best positioned for the upcoming 5G investment cycle."
- Booking Holdings (BKNG), $2,800: "Not only do we believe that BKNG can benefit from the continued travel recovery, but we see increased focus on direct traffic and Connected Trip as potential tailwinds."
- MYT Netherlands (MYTE), $15: "MYTE's target of high net worth individuals building wardrobes are typically more resilient to economic cycles, which should allow MYTE to deliver better than feared growth."
- Apple (AAPL), $185: "We forecast roughly 235/235 million phones sold in FY22 and FY23 respectively while Services and Wearables should grow materially above iPhone revenue growth over the next several years driven by increasing penetration rates of the iPhone installed base across by both Service offerings and ancillary products like the Watch and AirPods."
- Fox (FOXA), $47: "We see Fox as better positioned among traditional media networks due to its strategic focus on sports and news with minimal exposure to entertainment."
- Visa (V), $292: "Trading at 23 times our FY23 EPS, we believe valuation does not fully price in Visa's 5-year growth potential, and overstate threats from network disintermediaries and regulation."
- Micron (MU), $120: We "believe that as fundamentals and cycles prove to be more durable, there is a significant re-rating potential."
- CrowdStrike (CRWD), $240: "A track record of strong execution, an expanding core end-market, and underappreciated profitability keep us constructive on shares."
- See Credit Suisse's list of new leadership stocks.