Stock picking in the face of spike in inflation, recession, declining earnings: Jefferies
A slowdown could be on the horizon and analysts are predicting further downward earnings revisions. Add to that a possible spike in inflation, and this combination of factors could favor a certain class of stocks. Soaring inflation has supported the US Federal Reserve’s hawkish tilt, Jefferies said in a July 29 research report. But a recent drop in commodity prices is providing market relief on expectations of a spike in U.S. consumer prices, the bank said. Jefferies says a spike in inflation will favor one class of stocks: quality stocks. Quality companies are those whose performance is stable: solid balance sheets, modest debt and resilient profitability. “Our study of past periods of declining inflation expectations in the United States suggests that it is time to focus on quality stocks, which have deteriorated relative to [price-to-earnings] “, wrote analysts at Jefferies. In addition, a “style shift is underway” after more than 18 months of a cycle that has favored value stocks, according to Jefferies. Value stocks have been a major beneficiary of rising inflation, and it’s time to move on These stocks are trading at reduced levels relative to their fundamentals, such as earnings.” With rate hikes continuing to slow economic growth and declining PE dispersions, quality stocks will be in favor again,” Jefferies added. In July, markets experienced the first round of earnings downgrades, led by the US and Asia. of major sectors are now facing cuts in consumer services, utilities and tech hardware, Jefferies said.Month, we believe value will take a back seat amid slowing earnings and a difficult macroeconomic environment. Globally, we now prefer quality stocks as recession risks set in,” the bank said. She was overweight the health care and consumer sectors. : High profitability — return on equity and return on invested capital over the next two years greater than 10% Reasonable valuations — 12-month forward price-to-earnings ratio less than 25 times Good cash flow — companies with positive cash flow conversion free cash Growth and revision – “relatively better” CAGR of EPS for fiscal year 2022-2023 (compound annual growth rate of earnings per share) and earnings revision over the last three months. The screen turned out to be Apple, Visa, chipmaker Broadcom, retailers Home Depot and Dollar Among global stocks were pharmaceutical company Roche, automaker Volvo, computer company Fujitsu and chipmaker TSMC.
Apple Inc, Broadcom Inc., Dollar General Corp., economic news, Fujitsu Ltd., Home Depot Inc., Investment strategy, Jefferies Financial Group Inc., Taiwan Semiconductor Manufacturing Co Ltd, United States, Visa Inc., Volvo Car AB