As the risk of a recession draws nearer, Citi
group has produced a screen of 30 stocks to help investors find opportunities during the second half of 2022.
Stocks have rebounded in recent weeks with major indexes up by double digits from their June lows. The S&P 500 has risen about 10% since the end of June, bringing it closer to Citi’s revised year-end target of 4200. The market has been focused on macro risks like inflation but is moving closer to a recession resolution, said Scott Chronert, a Citi analyst, in an Aug. 5 note. He expects a mild recession during the first half of 2023, while Citi economists are modeling for a recession during the second half of that year.
Because of this, investors may want to consider single stocks with sound growth stories, Chronert said in the note.
Chronert said he expects higher valuations as the Fed comes off its current hawkish path toward the end of 2022. This means that as we get closer to a recession, the Fed is more likely to start easing. When that happens, price-to-earnings multiples can move higher, Chronert said. “In that environment, we are suggesting thematic names that can do well on the premise that the market will be looking for structural growth characteristics to navigate a recession effect,” Chronert told Barron’s.
Citi produced a screen, “The Thematic Thirty—Stock Selection Opportunities for 2H” that lists the top 30, large-cap stocks, all Buy-rated, that are associated with themes, that can help investors identify the next group of growth stocks. Stocks in these themes tend to have stronger revenue and earnings growth profiles, as well as higher margins, relative to the index average, according to the Aug. 5 note.
For this screen, Citi whittled down the themes to six: Automation/Robotics; Internet Driven Business Models; Artificial Intelligence; Emerging Manager, Top Brands; and Net Zero. The bank looked for above average earnings growth but screened out low-quality, positive or stabilizing revision trends, according to the note.
Topping the list is General Motors (ticker: GM), which appears in seven themes, including Automation/Robotics. GM’s stock is down about 36% this year but the stock is No. 1 on Citi’s list with an estimated total return over the next 12 months of 142.5%. GM rose more than 4% Monday to close at $37.57.
Next is MGM Resorts International (MGM). The stock appeared in five themes, including EM Consumer. MGM’s stock is down year-to-date by 23% but placed second on Citi’s list with an estimated total annual return of 65.5%. Shares were off by 21 cents to end Monday at $34.50.
In third place is Nvidia (NVDA) with an estimated annual return of 51.4%. On Monday, the chip maker shared preliminary financial results for the second quarter that were below expectations. This caused its stock to shed more than 6% to close at $177.93 Monday. Nvidia appeared in eight themes, including Artificial Intelligence. Shares are down 41% this year.
Booking Holdings (BKNG), which owns KAYAK, Priceline.com, Booking.com and OpenTable, provides online hotel reservations, vacation rentals and flights. The stock is down about 18% this year. Booking appears in five different themes including Internet Driven Business Models. It ranks fourth on Citi’s screen with a 45.2% estimated annual return Shares on Monday were up nearly 2% to end at $1955.80.
In fifth place is IPG Photonics (IPGP), which makes fiber lasers and amplifiers that are used in different industries such as telecommunications and medical. The stock had declined about 41% this year. IPG Photonics appeared in three themes including Automation/Robotics. Its estimated annual return is 43.5%, Citi said. The stock gained 32 cents to close at $102.16 Monday.
Shares of Walt Disney (DIS), the media company, have dropped more than 29% this year. Disney competes against rivals such as Netflix (NFLX) and Apple (APPL) in streaming but most of its profit potential lies in its theme parks segment. Disney touched five themes, including Top Brands. It ranks sixth with an estimated annual return of 36.1%. The stock increased by more than 2%, closing Monday at $109.11.
Last week, Amazon.com (AMZN) said it would buy Roomba maker iRobot (IRBT) for $1.7 billion. The e-commerce giant appeared in six Citi themes including Automation/Robotics. Amazon.com’s stock is down more than 16% but ranks seventh on the Citi screen with an estimated annual return of 31.3%. The stock on Monday was down about 1% to close at $139.41.
Meta Platforms (META) has seen its stock fall about 49% this year. Formally known as Facebook, Meta appeared in nine themes, the most of any company in the top 10. Meta’s estimated annual return is 31.2%. Shares were up more than 3% to $170.25 Monday.
Last week, PayPal ’s (PYPL) reported second-quarter earnings that came in ahead of expectations but the stock is still down about 49% this year. The fintech appears in eight Citi themes, including Internet Driven Business Models. Its estimated return over the next 12 months is 27.7%, which ranks it ninth on the screen. Shares were up 1% to $96.21.
There is also Domino’s Pizza (DPZ), which manages a network of company-owned and franchise-owned pizza stores. Two weeks ago, Domino’s reported second-quarter results that were mixed. The stock is down 30% this year. With an estimated annual return of 23.5%, Domino’s places 10th on Citi’s screen. Shares were up about 2% to $394.89 Monday.
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