Contrarian Big Name Stocks (& Sectors) To Consider Buying (& Selling), From Merrill Lynch
Contrarian Big Name Stocks (& Sectors) To Consider Buying (& Selling), From Merrill Lynch
5 hot stocks investors should avoid now: BofA Merrill Lynch
Investors are encouraged to be contrarian - to buy, as the legendary John Templeton advocated, at the "point of maximum pessimism."
But going against the grain can, well, go against the grain. Conventional wisdom and consensus is for most of us the easiest path. In particular, Wall Street money managers and analysts who enjoy their employment and bonuses know it's safer to own what everyone else is buying. The Japanese have a saying for this: "The sticking nail gets hammered."
Yet independent-minded investors don't have investment committees to appease. Accordingly, they can get ahead of the pack, which is especially crucial when market leadership changes, as is happening now.
Even better if you can remove the emotions that affect decision-making, which is what Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, does with computer-driven research. And recently those quantitative models have been saying to buy economically sensitive, so-called cyclical stocks - and to act now.
Contrarians, this is your time. Big institutional investors are shunning large-cap, global companies in cyclical industries. If you want a chance to outperform the market, go to the sectors and subsectors where these investment pros aren't competing, Subramanian suggests.
"Given their hated status by active managers, valuations of most GDP-sensitive subsectors are currently attractive," Subramanian told clients in a research note published on May 30.
Which of the S&P 500 (SPX) (SPY) stocks do most large-cap active managers like - and that you should avoid?
Look no further than several of the headline-grabbing "story stocks" that Merrill Lynch research flags as expensive and extremely popular, including Salesforce (CRM), Priceline Group (PCLN), Mastercard (MA), Chipotle Mexican Grill (CMG), and Michael Kors Holdings (KORS). These and other similar stocks are unlikely to benefit as the economic recovery progresses, the report said.
In contrast, many S&P 500 stocks within Semiconductors (SMH), Media, Autos and Industrial Conglomerates (XLI) are trading "well below trend multiples," the report added.
Not only are these cyclical stocks relatively inexpensive, investors have been discounting the anticipated higher interest rates and stronger economic growth worldwide that would favor them, Subramanian points out. Underowned, economically sensitive stocks on the firm's list include General Electric (GE), Caterpillar (CAT), Cisco Systems (CSCO), Broadcom (BRCM), Zimmer Holdings (ZMH), Urban Outfitters (URBN), and Eastman Chemical (EMN).
But if you're going to adopt this strategy, don't dally. Bargains don't last on Wall Street for long. "Buy large global cyclical stocks - until everyone else does," Subramanian says.
She adds: "We have seen some of these industries begin to rerate, suggesting that regret-averse investors may want to begin allocating to these subsectors today."
Courtesy of MarketWatch