Peak inflation will likely underpin stock market performance in the second half of the year, but at the same time equities are already pricing in a 40% chance of a recession, according to UBS.
Looking for better risk/reward, the equities team is getting incrementally defensive by upgrading Consumer Staples ( XLP ) to Overweight, going selective on cyclicals by downgrading Financials ( XLF ) to Underweight and upping Consumer Discretionary ( XLY ) to Overweight and tilting to "quality growth" by staying Overweight Info Tech ( XLK ) and Healthcare ( XLV ).
"After the 5th largest de-rating in the S&P 500 ( SP500 ) ( NYSEARCA: SPY ) P/E since the '60s amid inflation+growth worries, we reassess the relative setup for sectors and industries using our frameworks," strategist Keith Parker wrote in a note.
Consumer Discretionary forward P/E is near historical lows, Staples offer better implied returns than Real Estate ( XLRE ) and Utilities ( XLU ) and is cheaper, the rates overhang for Tech may have peaked and Healthcare earnings growth is solid at a cheap price, Parker said.
The top conviction ideas for the Overweight sectors with analyst comment are:
- Info Tech
- Apple ( NASDAQ: AAPL ), price target $185 - "Our channel checks indicate Apple’s key products are experiencing strong demand despite supply chain disruptions and lockdowns in China."
- CrowdStrike ( CRWD ), $240 - "Within security (an insulated area of IT spending), CrowdStrike is the market share leader in endpoint security and is expanding into growing markets including cloud security and security analytics."
- Microsoft ( MSFT ), $330 - "Azure is now > $50B run rate business growing at just under 50% C/C, faster than competitors."
- Five9 ( FINV ), $180 - "Five9 continues to move up market with very large Enterprise wins and we believe the growth potential, competitive moat and strong execution to-date are more defensible and worthy of a premium to peers."
- Dell Technologies ( DELL ), $70 - "An aggressive share buyback in conjunction with a recently initiated dividend ($1.75 billion capital returned in the last quarter - ~5% of mkt cap) should support shares despite macro uncertainty."
- Micron ( MU ), $90 - "MU’s technology leadership and supply constraints should drive sustained GM and prevent a correction in DRAM pricing in ’23 even as consumer demand softens."
- Visa ( V ), $292 - "Trading at 24x our FY 2023E EPS, valuation already prices-in a mild recession and does not fully price-in Visa’s 5-year top and bottom-line growth potential of low teens and high-teens respectively."
- Healthcare
- Arvinas ( ARVN ), $151 - "High conviction call on targeted protein degradation technology, which we think could be the largest innovation in biopharma in the coming years, akin to the discovery of antibodies ($150B+ in current annual sales)."
- Elevance Health ( ELV ), $595 - "ELV is positioned to recapture Medicaid lives through its strong HIX /commercial businesses and its diversified portfolio should offset headwinds in its commercial book from a recession."
- Horizon Therapeutics ( HZNP ), $137 - "Horizon’s key drug Tepezza has a strong growth trajectory ahead for increasing penetration in thyroid eye disease; meanwhile, multiple pipeline assets are underappreciated."
- Humana ( HUM ), $532 - "We look for valuations to expand back to historical levels as growth prospects become clearer."
- IQVIA ( IQV ), $292 - The "company is best positioned in our opinion to take advantage of emerging CRO industry trends such as DCTs and data solutions software."
- Laboratory Corp. ( LH ), $312 - "LH shares have underperformed peers and broader market YTD on CRO segment concerns and while we do not disagree these are near-term headwinds, we believe better clarity on the outlook (2Q earnings on 7/28) could be a clearing event."
- Vertex Pharma ( VRTX ), $321 - VRTX has "double-digit 5yr top-line CAGR" and "an emerging pipeline."
For further details see:
UBS lists top conviction stock ideas for its favorite sectors