For anybody that has missed the big stock market rally, it can be very disheartening to watch as anchors on every business and news channel talk about indices hitting all-time highs day after day. One thing that can be even more disheartening is jumping into the stock market at the top and seeing your investment quickly down 5% or more. Despite some near-term positives and an economy that is slowly healing, most Wall St. firms feel the markets are overbought and we may be due for a correction.
One Wall St. firm that believes a correction is near is UBS A.G. (NYSE: UBS). In a new report it points out that, since mid-November, the S&P 500 has risen 14.6% thanks to a flood of central bank liquidity and falling domestic and international event (tail) risks. However, UBS believes that recent stock returns have been disconnected from relatively weak underlying economic and earnings trends. Notably, its is convinced that the “risk on/risk off” trading environment will continue.
Given the cautious near-term outlook, UBS expects defensive characteristics to generate the most gains (alpha) over the remainder of the year. In particular, it favors companies generating the highest returns on equity relative to their industry peers. Historically, this has been the most defensive portfolio tilt that the firm tracks.
So if you have money you want to put to work now but are worried about a market correction, the analysts at UBS have a list of names with high returns on equity that may just weather a coming correction much better than others.
American car maker Ford Motor Co. (NYSE: F) has had a nice turnaround, but growth in Europe has been tepid. The Thomson/First Call consensus price target is $15.
Home improvement retailer Home Depot Inc. (NYSE: HD) has been on fire lately. Shares are trading close to a 52-week high. The Wall St. target is $75.
Coffee giant Starbucks Corp. (NASDAQ: SBUX) has an ever-growing product line in its stores and is a good candidate for purchase. The consensus price target is $64 and business has been strong.
Biotech darling Gilead Sciences Inc. (NASDAQ: GILD) is a Wall St. favorite that could be very attractive, even at this entry point. Share are trading right at a 52-week high, and the consensus price target is $47.
Health care industry leader McKesson Corp. (NYSE: MCK) delivers pharmaceuticals, medical supplies and health care information technologies, primarily in the United States. The consensus target for this popular holding is $117.
Generic and branded pharmaceutical company Mylan Inc. (NASDAQ: MYL) is another health care industry name that makes the UBS list. The consensus estimate is $33.
Diesel and natural gas engine maker Cummins Inc. (NYSE: CMI) has a broad product line and is a widely owned portfolio stock on Wall St. It has four separate divisions to provide earnings growth and diversity, and the consensus estimate is $132.
The last name on the UBS list is analog integrated circuit maker Linear Technology Corp. (NASDAQ: LLTC). The consensus price target for this popular tech stock is $37.70.
There are two very common threads for investors to remember when reviewing and considering the stocks on the list. These are all quality, widely owned companies, and they may have upside potential from their already lofty levels. If you truly feel the need to put money to work at all-time market highs, it may be best to scale or dollar cost average into these stocks. That can leave you some fresh powder when a correction does come.