The technology sector has been on fire this year and seems like the proverbial unstoppable force. That’s the way it seemed in 1999 and 2000 as well, and while the absurd valuations from the dot-com bubble are not as pervasive today as then, the sector is way overbought and expensive. In fact, Facebook, Apple, Microsoft, Amazon, Google and Netflix now account for 27% of the S&P 500 market capitalization, up from 18% at the start of this year.
While it’s a tough decision to sell or even pare down holdings in these market leaders, it is clear that some rotation by money managers already has started. If it really picks up steam, a lot of the big gains those stocks and others have generated may be surrendered.
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New reports from top Jefferies strategists Christopher Wood and Steve DeSanctis suggest lowering exposure to technology and focusing on the top cyclical names, which may be poised to outperform with a pickup in the economy of the rest of 2020 and next year as well. One report noted this:
DeSanctis now looks for cyclicals to outperform over growth and bond proxies, and he pointed out that while these stocks have started to come back to life, they remain very cheap. He also pointed out that the ISM Manufacturing Index has made a bottom, and the trend in earnings and sales revisions has improved faster among the cyclicals. Steven also switched his preference for foreign over domestic and believes that better growth outside of the US could weaken the US dollar. He continues to favor value over growth, and high return on equity names.
The reports suggested 13 stocks as top small and mid-cap cyclicals stocks to rotate to, with all having Buy rating. We chose six of the best-known stocks that have solid upside to the Jefferies price targets. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Deckers Outdoor
This clothing manufacturer makes some of the hottest selling products and could be poised for a solid fall and winter selling season. Deckers Outdoor Corp. (NYSE: DECK) designs and markets footwear and accessories for men, women and children. Deckers sells its products, including accessories such as handbags, headwear and outerwear, through domestic and international retailers, international distributors and directly to end-user consumers both domestically and internationally, through websites, and retail stores under the UGG (73% of revenue), HOKA (14%), Teva (6%), Sanuk (3%) and Koolaburra (3%) brands.
The analysts have championed this company for some time and noted this in a recent report:
Deckers Outdoors is proving exceptionally resilient in navigating COVID, thanks in large part to its strong brands (UGG, HOKA) which are demonstrating robust, channel-agnostic consumer demand. While UGG is typically viewed as a fall/winter brand, UGG’s strong sell-through during COVID helped further legitimize its standing as a year-round brand. In addition, HOKA remains on a path to be a $1B+ brand, and we continue to see L-T growth opptys in hiking/training, int’l and new product categories. We raised our estimates and model F21 and F22 EPS ahead of consensus.
The Jefferies price objective for the shares is $245, and the Wall Street consensus target price is much lower at $214.07. Deckers Outdoor stock closed at $211.12 a share on Monday, up almost 3% on the day.
Lear
This stock has bounced nicely off the March lows but still offers a solid entry point. Lear Corp. (NYSE: LEA) is a supplier of automotive seating and electrical systems. The company generates approximately 75% of its revenue from its seating business, with the remainder attributable to electrical systems.
Lear has made significant strides in its restructuring efforts, and it is the second-largest seating supplier globally. Recently Lear was named a GM Supplier of the Year by General Motors during a virtual ceremony honoring the recipients of the company’s 28th annual Supplier of the Year awards. This is the 19th time Lear has been named a GM Supplier of the Year. As a winner in 2019, Lear’s seating division exceeded GM’s targets for business performance and cultural priority metrics.
Jefferies has a $120 price objective, while the consensus target price is $124.53. Lear stock was last seen trading at $118.97.
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