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These ‘quality cyclical’ stocks have sold off too much and are due for a bounce, UBS says


The S & P 500 came off its lows for the year after last week’s big bounce, and UBS has highlighted several stocks that could be good to own as the market continues to recover. On Tuesday, the broad-market index pulled back slightly. Investors are uncertain of the rally’s sustainability as signs of peaking inflation and overblown inflation fears have started to show. In a Tuesday note, UBS said the S & P 500 is oversold by 4 percentage points for the year on fears of a recession induced by the Federal Reserve. The firm said investors should look to quality cyclical stocks for good post-sell-off opportunities. “Tightening of financial conditions was the biggest headwind to equities (-8ppts) but peak Fed hawkishness and falling bond vol should mitigate further downside,” strategist Keith Parker said in the note. “Our models indicate that cyclicals vs defensives have undershot macro drivers by 10% over the last 3mo, the largest amount since 2012, providing a supportive buffer,” Parker added. “Cyclicals vs defensives have historically recovered 3%-5% over the next 3-6mo when dislocations have reached these extremes.” UBS screened for 40 cyclical quality stocks in the S & P 1500 that the firm says have undershot fundamentals based on its models. Parker said the screen has underperformed the S & P 500 by 9% since the second quarter, and it has an implied upside of 11% to the firm’s models’ fair value. The list does not include sell-rated names. Here are 10 of the stocks: Source: UBS Under Armour is one of the smaller companies by market cap mentioned, and it rates in the 99th percentile of UBS’ cyclical ranking. The stock is currently down about 50% for the year. Bath & Body Works is right behind it, in the 98th percentile in the cyclical ranking. The stock has fallen 41% in 2022. In the quality ranking, T. Rowe Price is the top stock mentioned, in the 99th percentile. Shares are off 35% for the year. Other top quality names include Align Technology and Applied Materials , which have lost 57% and 25% in 2022, respectively. Simon Property Group , Avis Budget Group , American Financial Group , Nucor Corporation and Gartner are also in the screen.

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