Savvy investors know that a big rotation has been happening across Wall Street over the past six months. Momentum stocks that make little or no profit are in the penalty box, along with large-cap technology recently, as inflation and the threat of higher interest rates have taken their toll. So where are the stocks investors should look to now that also have alpha potential? One top Wall Street strategist may have the answer.
Steven DeSanctis, the outstanding Equity Strategist at Jefferies, focuses on small-cap and mid-cap stocks, better known as the SMID sector. In a recent research report, he makes the case that there are currently a number of companies with value characteristics but momentum potential:
Since the market low, valuations have worked well, but we still like these factors. Cheap stocks are still cheap, if Value beats Growth, cheaper drives performance. We have also seen a rebound in Price Momentum and given how bad this factor has been, we think a long road ahead of it working. The top Momentum names have a cyclical bent. These two factors are very powerful over time, thus we screened for Buy-rated names that rank well on both factors, and found 16 ideas.
We looked through the 16 stocks that have market caps above $1 billion, but below $35 billion, and found five that are cheap on an absolute basis but appear to have the potential for solid price movement. Though all are rated Buy at Jefferies, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Advance Auto Parts
This top stock has solid upside potential and is in a very strong sector. Advance Auto Parts Inc. (NYSE: AAP) provides automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy-duty trucks.
The company operates stores under the Advance Auto Parts, Autopart International and Carquest brands, as well as branches under the Worldpac name. As of January 2, 2021, it operated 4,806 stores and 170 branches in the United States, Puerto Rico, the U.S. Virgin Islands and Canada, and it served 1,277 independently owned Carquest branded stores in Mexico, Grand Cayman, the Bahamas, Turks and Caicos and the British Virgin Islands.
While auto parts retailer stocks have done relatively well over the past year, many across Wall Street, including Jefferies, feel that there’s still more room for the rally to continue. In addition, Advance Auto and other retail auto parts companies have the ability to pass on higher costs to consumers, given the nondiscretionary nature of auto parts. That’s a good place to be when inflation is rising.
Shareholders receive a 2.05% dividend. Jefferies has a $235 price target on the shares, while the Wall Street consensus target is $215.56. Friday’s final Advance Auto Parts stock trade was reported at $194.94 a share.