5 Stocks to Rotate to Now as Stock Market Melt-Up Rally Hits a Massive Wall

Investing

Published: June 12, 2020 7:05 am

It was nice while it lasted, and there is a good chance that later this summer we could resume an uptrend. However, the incredible “melt-up” rally that has been rolling along for almost three months may be ready to take a huge breather, if Thursday’s action is any guide. Mid-single-digit declines across the board may force some of the new investors that have jumped in right back to the sidelines. Many Wall Street veterans have been stunned as, into the storm of a continued COVID-19 pandemic, massive social disorder and horrible economic news, the markets had recouped almost all of the losses from the 35% sell-off from the top.

It’s not uncommon during massive downdrafts and bear markets for there to be substantial moves higher. Professional investors, and especially hedge funds, look for opportunities both ways. You can bet they have been laying the trades back on in their short books over the past couple of weeks. The good news for investors is at least all the negatives that are troubling for equities are known about now. That wasn’t the case back in mid-February.

We screened the BofA Securities research universe looking for companies that had lagged the massive tech rally and appear to be rebounding. Financials and energy caught our eye, in addition to some cyclicals that look tempting. We found five stocks that are rated Buy that make sense as we consolidate the huge rally.

Citigroup

Shares of this top bank are trading at the lowest levels since 2016. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 7.2 times estimated 2020 earnings, this one looks very reasonable in what remains a volatile stock market.

Investors receive a 4.22% dividend. The BofA Securities price target for the shares is $57, while the Wall Street consensus target is up at $64.75. Citigroup stock closed trading Thursday at $48.39, down a stunning 13% on the day.

Exxon

This is another safer long-term play for conservative investors, and the energy giant is trading at 16-year lows. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.

Earlier this year Exxon announced plans for spending cuts amid the coronavirus outbreak that caused a price slide significantly aggravated by Saudi Arabia’s decision to start raising oil production. Exxon’s budget for this year and every year until 2025 was set at between $30 billion and $35 billion. Many on Wall Street feel that could be cut 10% to 20% or more. Note that Exxon has one of the highest paid American CEOs.

The analysts remain very positive and said this when Exxon reported:

Despite some confusion on the company’s reported earnings, we contend that on a peer to peer comparison the first quarter is a clean beat versus the street. COVID-19 is the great equalizer. All majors will lean on the balance sheets, but Exxon can reduce spending as needed with growth in the recovery. The second quarter promises more sticker shock but Exxon’s yield pays investors to wait through this downturn with growth beyond.

The company pays investors a huge 7.54% dividend, which probably will be defended. BofA Securities has an $80 price objective, but the consensus estimate is higher at $83.92. Exxon Mobil stock closed down almost 9% on Thursday to $46.18.