- Keith Parker, UBS’ chief US equity strategist, has identified a number of catalysts that have been swinging the markets to wins and losses in recent weeks.
- Parker and his team remain bullish on the stock market despite the risks and uncertainties ahead.
- They mapped out key themes that they believe will offer investors attractive upside and limited downside.
- The team screened the equity universe for 23 stocks exposed to such themes and incorporated UBS analysts’ views into the stocks that made the cut.
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A lot of catalysts are moving the stock market these days.
From the potential passage of another stimulus bill, election-related uncertainty, and another surge in COVID-19 cases to news of a vaccine, an unexpected rise in unemployment, and pent-up consumer savings, these headwinds and tailwinds are what UBS strategist Keith Parker calls “cross-currents.”
“With all the catalysts on the horizon, we saw risks tilted to the downside,” Parker told Business Insider in an interview. “We’ve seen the market sell off as a lot of the tailwinds that we saw from the market in August turned into either net headwinds or neutral.”
However, Parker and his team remain bullish despite the recent sell-offs and the many risks ahead.
“With continued recovery, low rates, and continued rising earnings through 2022, and ‘getting back to normal’ at the end of next year,” he said, “looking ahead to 2022, we do still see significant gains on the horizon for the equity market as and when we move through these catalysts.”
Their positive sentiment on the stock market is anchored towards a number of themes that they believe will offer investors an attractive upside and limited downside, or “asymmetry” in the parlance of investing.
One of the themes Parker is watching closely is the production rebound, which is based on declines in inventory and inventory/sales ratios.
“We saw the record collapsing in inventories in the US relative to GDP despite such weak demand in the second quarter, so inventory restocking with demand recovering in Q3 and beyond, we should see a very healthy rebound in production,” he explained. “So those companies and industries where we’ve seen inventory decline more than sales offer an attractive reward versus the risk.”
Parker and his team also scanned for companies with pricing and margin momentum. They looked at companies’ sensitivity to vaccine news and election risk in terms of potential tax impacts as well as sensitivities to changes in election odds.
They examined other themes such as a company’s yield based on free cash flow, dividends, estimated 2022 earnings per share, as well as a company’s growth based on level and change in next-twelve-month and 3-5 year EPS growth.
After filtering stocks in the mid-to-large-cap S&P 900 index based on such themes, Parker and his team took the stocks that screened in the top third and asked UBS analysts to present their highest-conviction stock picks.
“So it’s a combination of a top-down and also bottom-up insights,” Parker said. “Given the risk versus the reward backdrop, we think these stocks offer a great opportunity.”
The list of 23 stocks, along with their tickers, sectors, and analyst commentaries, are listed below.