After what can only be called a dismal first half, most investors are looking for some relief in the form of returns for the remainder of 2022. If anything is different about the current moment, it is that investors are looking for potential short-term winners to help reduce, if not overcome, the losses of the first half of the year.
On Friday, Bank of America published its Top 10 U.S. Ideas for the third quarter. The bank’s chief investment strategist, Michael Hartnett, continues to expect a strong bear market and that the bottom has still not been reached. He also thinks that markets “could experience strong bear market rallies in the near-term” and that investors “should sharpen their pencils and be ready to add to positions on abrupt and potentially short-lived pull-backs.”
As for the Federal Reserve and rising interest rates, BofA believes that the federal funds rate will close 2022 at 3.25% to 3.50% and rise to 4.0% to 4.25% by the middle of next year. The banks’ economists do not expect any rate cuts this year but believe the market will price rate cuts in as global growth continues to slide.
BofA’s fundamental equities analysts have picked nine high-conviction ideas to buy and one to short. Here is a look at BofA’s Top 10 Ideas for U.S. stocks in the third quarter.
AutoZone Inc. (NYSE: AZO) gets the sole Underperform rating. BofA analyst Elizabeth Suzuki also has a price objective of $1,795. At Friday’s closing price of around $2,160, the potential downside on the shares was 16.7%. Suzuki points out that about 80% of the company’s customers are do-it-yourselfers who will be watching their spending more closely during the current inflationary period.
A related issue is the lapping of last year’s stimulus-driven sales, which raised the target for same-store sales: “Assuming no new incremental government benefits, the lapping of stimulus payments combined with rising cost of living presents a material [year-over-year] headwind to DIY auto parts spending, which is likely one of the factors driving the YoY decline in auto parts retail spending ….”
The upside risk to the bank’s view is stronger than expected demand, a resurgence in COVID-19 infections, more economic stimulus for low-income consumers and larger than expected share buybacks.
Charles Schwab Corp. (NYSE: SCHW) is a financial services firm that focuses on retail investors but includes advisory services as well. Analyst Craig Siegenthaler has a Buy rating on the stock, with a price objective of $90. At Friday’s closing price of around $64, the upside potential to BofA’s target was 40.6%. Schwab is expected to benefit from rising interest rates because about 60% of its revenue stream is tied to those rates.
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