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Quality and FCF: should perform through cycle
As we discussed above, quality is the best performing factor from an ISM peak to a trough. We calculate a composite quality score for sectors and IGs based on ROIC, margins and volatility. Additionally, FCF yield is essentially the best performing value factor through the ISM cycle, so we combine the quality score with FCF yield to assess sector and industry fundamentals.
C-Speak proprietary signal: where has corporate sentiment shifted?
With over 81% of S&P 500 companies reporting Q2 results, our proprietary net sentiment signal, calculated with data provided by UBS Evidence Lab, is tracking 10bp lower q/q, as measured by the % of positive less negative language from company management (i.e. C-Speak) in the conference call transcripts. However, the changes in net sentiment have varied much more across sectors and industries. We assign a corporate sentiment score to each sector and IG based on the q/q change in net sentiment as well as the level.
Company management sentiment has declined the most within Food & Staples Retail, Media & Enter, Semis, Autos, Tech Hdwr, HH & Pers Prod and Materials.
Figure 67: C-Speak corporate net sentiment change
Net Sentiment, QoQ change
-2.5% |
-1.5% |
-0.5% |
0.5% |
1.5% |
Real Estate
Cons Disc
Industrials
Financials
Health Care
Energy
Technology
Utilities
Materials
Cons Staples
Comm Svcs
Com & Prof Svcs
Retailing
Consumer Svcs
Software & Svcs
Real Estate
Banks
Pharma Biotech & LS
Insurance
Cons Dur & App
Capital Goods
Food Bev & Tob
Transportation
Energy
Utilities
Telecom
HC Equip & Svcs
Materials
Div Financials
HH & Personal Prod
Tech Hdwr & Equip
Autos & Comp
Semis & Equip
Media & Entertain
Food & Stap Retail
Source: UBS
Figure 68: Free cash flow yield
FCF Yield % (LTM)*
0 |
2 |
3 |
5 |
6 |
8 |
Financials
Technology
Health Care
Industrials
Comm Svcs
Materials
Cons Staples
Cons Disc
Energy
Utilities
Real Estate
Telecom
Banks
Semis & Equip
Tech Hdwr & Equip
Pharma Biotech &…
Autos & Comp
Food & Stap Retail
HC Equip & Svcs
Capital Goods
Insurance
Transportation
Materials
Software & Svcs
HH & Personal Prod
Consumer Svcs
Food Bev & Tob
Com & Prof Svcs
Retailing
Media & Entertain
Div Financials
Energy
Utilities
Cons Dur & App
Real Estate
Source: FactSet, UBS *Note: Financials, Banks, Div Fins, Insurance and Utilities data are Total Yield.
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Stock Baskets: Laggards, Leaders, Losing
Momentum, Dividend Upside
Basket 1: Laggards with solid fundamentals
After large de-ratings and underperformance, we look for stocks that have upside that is perhaps underappreciated by the market. To screen for laggards with the potential for upside, we selected the following within the S&P 500:
1)Laggards: YTD performance in the bottom 1/3 of the S&P 500.
2)De-rated: change in NTM P/E since Mar'18 in the bottom 40% (i.e. biggest deratings).
3)Solid EPS momentum: earnings revisions (3m) in the top 60%.
4)Solid sales trends: removed the bottom quintile of sales revisions.
Figure 69: Stocks that have underperformed/de-rated but have solid fundamental trends
Ticker |
Name |
GICS Sector |
GICS Industry Group |
Rating |
Price target |
Price |
|
|
|
|
|
|
|
|
|
DISH |
DISH Network Corp A |
Communication Services |
Media & Entertainment |
Neutral |
$37.0 |
$31.7 |
|
T |
AT&T Inc |
Communication Services |
Telecommunication Services |
Buy |
$38.0 |
$30.8 |
|
HOG |
Harley-Davidson Inc |
Consumer Discretionary |
Automobiles & Components |
Neutral |
$40.0 |
$40.8 |
|
KORS |
Michael Kors Holdings Ltd |
Consumer Discretionary |
Consumer Durables & Apparel |
Buy |
$80.0 |
$47.8 |
|
PVH |
PVH Corp |
Consumer Discretionary |
Consumer Durables & Apparel |
Neutral |
$170.0 |
$119.8 |
|
NCLH |
Norwegian Cruise Line Holdings Ltd |
Consumer Discretionary |
Consumer Services |
Neutral |
$61.0 |
$48.6 |
|
RCL |
Royal Caribbean Cruises Ltd |
Consumer Discretionary |
Consumer Services |
Buy |
$155.0 |
$104.7 |
|
CAG |
Conagra Brands, Inc |
Consumer Staples |
Food Beverage & Tobacco |
Buy |
$40.0 |
$35.3 |
|
MNST |
Monster Beverage Corp New |
Consumer Staples |
Food Beverage & Tobacco |
Not Rated |
|
$54.8 |
|
CXO |
Concho Resources Inc |
Energy |
Energy |
Buy |
$181.0 |
$129.8 |
|
DVN |
Devon Energy Corp |
Energy |
Energy |
Buy |
$53.0 |
$31.6 |
|
PXD |
Pioneer Natural Resources |
Energy |
Energy |
Buy |
$243.0 |
$154.3 |
|
XEC |
Cimarex Energy Co |
Energy |
Energy |
Buy |
$118.0 |
$86.2 |
|
PBCT |
People's United Financial Inc |
Financials |
Banks |
Neutral |
$19.0 |
$15.7 |
|
CBOE |
Cboe Global Markets, Inc |
Financials |
Diversified Financials |
Neutral |
$114.0 |
$107.7 |
|
COF |
Capital One Financial |
Financials |
Diversified Financials |
Buy |
$112.0 |
$89.1 |
|
GS |
Goldman Sachs Group Inc |
Financials |
Diversified Financials |
Neutral |
$245.0 |
$206.1 |
|
MS |
Morgan Stanley |
Financials |
Diversified Financials |
Buy |
$59.0 |
$44.1 |
|
RJF |
Raymond James Financial Inc |
Financials |
Diversified Financials |
Not Rated |
|
$78.0 |
|
STT |
State Street Corp |
Financials |
Diversified Financials |
Buy |
$93.0 |
$70.9 |
|
HIG |
Hartford Finl Services Group |
Financials |
Insurance |
Buy |
$61.0 |
$45.5 |
|
PFG |
Principal Financial Group |
Financials |
Insurance |
Neutral |
$53.5 |
$48.6 |
|
UNM |
Unum Group |
Financials |
Insurance |
Neutral |
$39.0 |
$37.0 |
|
BMY |
Bristol-Myers Squibb |
Health Care |
Pharmaceuticals, Biotechnology & Life Sciences |
Neutral |
$59.0 |
$52.9 |
|
CELG |
Celgene Corp |
Health Care |
Pharmaceuticals, Biotechnology & Life Sciences |
Buy |
$94.0 |
$71.0 |
|
ARNC |
Arconic Inc |
Industrials |
Capital Goods |
Not Rated |
|
$20.1 |
|
CAT |
Caterpillar Inc |
Industrials |
Capital Goods |
Buy |
$160.0 |
$125.0 |
|
NOC |
Northrop Grumman Corp |
Industrials |
Capital Goods |
Neutral |
$315.0 |
$277.6 |
|
PCAR |
PACCAR Inc |
Industrials |
Capital Goods |
Neutral |
$68.0 |
$58.4 |
|
PWR |
Quanta Services Inc |
Industrials |
Capital Goods |
Buy |
$43.0 |
$33.6 |
|
ROK |
Rockwell Automation Inc |
Industrials |
Capital Goods |
Buy |
$205.0 |
$166.0 |
|
URI |
United Rentals Inc |
Industrials |
Capital Goods |
Buy |
$180.0 |
$121.2 |
|
FDX |
FedEx Corp |
Industrials |
Transportation |
Neutral |
$256.0 |
$219.6 |
|
DXC |
DXC Technology Company |
Information Technology |
Software & Services |
Not Rated |
|
$62.0 |
|
IBM |
Intl Business Machines Corp |
Information Technology |
Software & Services |
Buy |
$150.0 |
$120.9 |
|
AVY |
Avery Dennison Corp |
Materials |
Materials |
Buy |
$135.0 |
$91.5 |
|
|
|
|
|
|
|
|
|
Source: FactSet, UBS Note: Stocks are selected using quantitative criteria based on key themes, and the results may differ from analyst recommendations.
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Basket 2: High momentum + growth
Momentum has been the best performing factor when the ISM is high/falling, and momentum+growth and leadership tend to persist at this stage of the cycle. We screened the S&P 500 for high-momentum stocks using an equal-weighted composite score of 3-month earnings/sales revisions and price momentum (12 months ex 1 month), controlling for decelerating sales growth and margin risk with the following screens based on the respective percent ranks:
1)High price and fundamental momentum: top 40% of composite momentum in the S&P 500, based on 3m EPS and sales revision, and 12-1m price momentum.
2)Accelerating sales growth: top 60% of based on the change in the rate of sales growth in 2019 (i.e., FY2 sales growth y/y minus FY1 sales growth y/y). We also eliminated the bottom 10% of 2019 sales growth y/y.
3)Margin momentum that is positive: top 50% based on the change in EBIT margins in 2018, vs. 2017 (i.e., EBIT margin expansion in 2018). We also eliminated the bottom 10% based on the expected EBIT margin change in 2019.
Figure 70: Stocks with high momentum and growth that could lead into next year
|
Ticker |
Name |
GICS Sector |
GICS Industry Group |
Rating |
Price target |
Price |
|
|
|
|
|
|
|
|
|
|
|
IPG |
Interpublic Group Cos |
Communication Services |
Media & Entertainment |
Not Rated |
|
$24.0 |
|
|
TPR |
Tapestry, Inc |
Consumer Discretionary |
Consumer Durables & Apparel |
Buy |
$62.0 |
$41.3 |
|
|
UAA |
Under Armour Inc A |
Consumer Discretionary |
Consumer Durables & Apparel |
Neutral |
$24.0 |
$22.6 |
|
|
DRI |
Darden Restaurants Inc |
Consumer Discretionary |
Consumer Services |
Not Rated |
|
$112.4 |
|
|
RCL |
Royal Caribbean Cruises Ltd |
Consumer Discretionary |
Consumer Services |
Buy |
$155.0 |
$104.7 |
|
|
AAP |
Advance Auto Parts Inc |
Consumer Discretionary |
Retailing |
Buy |
$190.0 |
$167.1 |
|
|
KSS |
Kohl's Corp |
Consumer Discretionary |
Retailing |
Neutral |
$80.0 |
$80.8 |
|
|
SYY |
Sysco Corp |
Consumer Staples |
Food & Staples Retailing |
Not Rated |
|
$67.4 |
|
|
HES |
Hess Corp |
Energy |
Energy |
Neutral |
$70.0 |
$57.5 |
|
|
PSX |
Phillips 66 |
Energy |
Energy |
Not Rated |
|
$97.7 |
|
|
PXD |
Pioneer Natural Resources |
Energy |
Energy |
Buy |
$243.0 |
$154.3 |
|
|
PBCT |
People's United Financial Inc |
Financials |
Banks |
Neutral |
$19.0 |
$15.7 |
|
|
ANTM |
Anthem Inc |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
$282.7 |
|
|
BSX |
Boston Scientific Corp |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
$36.9 |
|
|
HCA |
HCA Healthcare Inc |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
$141.9 |
|
|
RMD |
ResMed Inc |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
|
|
|
PFE |
Pfizer Inc |
Health Care |
Pharmaceuticals, Biotechnology & Life Sciences |
Buy |
$48.5 |
$44.1 |
|
|
BA |
Boeing Co |
Industrials |
Capital Goods |
Buy |
$515.0 |
$357.0 |
|
|
FLR |
Fluor Corp |
Industrials |
Capital Goods |
Buy |
$67.0 |
$45.0 |
|
|
FLS |
Flowserve Corp |
Industrials |
Capital Goods |
Neutral |
$46.0 |
$49.3 |
|
|
GWW |
Grainger W.W. Inc |
Industrials |
Capital Goods |
Neutral |
$365.0 |
$291.7 |
|
|
HII |
Huntington Ingalls Industries Inc. |
Industrials |
Capital Goods |
Buy |
$290.0 |
$214.1 |
|
|
LMT |
Lockheed Martin |
Industrials |
Capital Goods |
Buy |
$400.0 |
$305.1 |
|
|
RTN |
Raytheon Co |
Industrials |
Capital Goods |
Buy |
$240.0 |
$182.0 |
|
|
CPRT |
Copart Inc |
Industrials |
Commercial & Professional Services |
Not Rated |
|
$49.3 |
|
|
CTAS |
Cintas Corp |
Industrials |
Commercial & Professional Services |
Not Rated |
|
$176.8 |
|
|
AKAM |
Akamai Technologies Inc |
Information Technology |
Software & Services |
Not Rated |
|
$69.1 |
|
|
BR |
Broadridge Financial Solutions Inc. |
Information Technology |
Software & Services |
Not Rated |
|
$106.2 |
|
|
GPN |
Global Payments Inc |
Information Technology |
Software & Services |
Not Rated |
|
$109.3 |
|
|
MSFT |
Microsoft Corp |
Information Technology |
Software & Services |
Buy |
$125.0 |
$106.9 |
|
|
PYPL |
PayPal Holdings Inc. |
Information Technology |
Software & Services |
Buy |
$95.0 |
$83.8 |
|
|
V |
Visa Inc A |
Information Technology |
Software & Services |
Neutral |
$146.0 |
$139.7 |
|
|
CSCO |
Cisco Systems Inc |
Information Technology |
Technology Hardware & Equipment |
Buy |
$56.0 |
$45.6 |
|
|
|
|||||||
|
HPE |
Hewlett Packard Enterprise Co |
Information Technology |
Technology Hardware & Equipment |
Neutral |
$17.0 |
$15.3 |
|
|
NTAP |
NetApp Inc |
Information Technology |
Technology Hardware & Equipment |
Not Rated |
|
$78.9 |
|
|
CF |
CF Industries Holdings |
Materials |
Materials |
Buy |
$63.0 |
$51.3 |
|
|
AVB |
AvalonBay Communities Inc |
Real Estate |
Real Estate |
Not Rated |
|
$184.3 |
|
|
NEE |
NextEra Energy Inc |
Utilities |
Utilities |
Buy |
$195.0 |
$178.5 |
|
|
|
|
|
|
|
|
|
|
Source: FactSet, UBS Note: Stocks are selected using quantitative criteria based on key themes, and the results may differ from analyst recommendations.
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Basket 3: Low momentum and slowing growth
We screen for low-momentum stocks that should underperform given where we are in the cycle. Using an equal-weighted score of 3m EPS/sales revisions and price momentum (12 months ex 1 month), and controlling for potential sales/margin upside within low-momentum stocks, we screened the S&P 500 for the following:
1)Low momentum: bottom 40% of composite momentum within the S&P 500, based on 3m EPS and sales revision, and 12m price momentum (ex 1m).
2)Slowing sales growth: bottom 60% based on the change in the rate of sales growth in 2019 (i.e., FY2 sales growth y/y minus FY1 sales growth y/y). We also eliminated the top 10% based of 2019 sales growth y/y.
3)Margin momentum that is weak: bottom 50% based on the change in EBIT margins in 2018, vs. 2017 (i.e., EBIT margin expansion in 2018). We also eliminated the top 10% based on the expected EBIT margin change in 2019.
Figure 71: Stocks with low momentum, slowing growth and weaker margin trends
Ticker |
Name |
GICS Sector |
GICS Industry Group |
Rating |
Price target |
Price |
|
|
|
|
|
|
|
|
|
BWA |
Borgwarner Inc |
Consumer Discretionary |
Automobiles & Components |
Buy |
$57.0 |
$37.9 |
|
HBI |
Hanesbrands Inc |
Consumer Discretionary |
Consumer Durables & Apparel |
Neutral |
$17.5 |
$16.2 |
|
LEG |
Leggett & Platt |
Consumer Discretionary |
Consumer Durables & Apparel |
Not Rated |
|
$36.8 |
|
MHK |
Mohawk Industries Inc |
Consumer Discretionary |
Consumer Durables & Apparel |
Not Rated |
|
$121.5 |
|
CCL |
Carnival Corp |
Consumer Discretionary |
Consumer Services |
Buy |
$76.0 |
$57.8 |
|
EBAY |
eBay Inc. |
Consumer Discretionary |
Retailing |
Buy |
$42.0 |
$29.0 |
|
EXPE |
Expedia Group, Inc. |
Consumer Discretionary |
Retailing |
Buy |
$156.0 |
$122.3 |
|
GPS |
Gap Inc |
Consumer Discretionary |
Retailing |
Neutral |
$31.0 |
$27.4 |
|
LB |
L Brands Inc |
Consumer Discretionary |
Retailing |
Neutral |
$31.0 |
$37.0 |
|
LKQ |
LKQ Corp |
Consumer Discretionary |
Retailing |
Not Rated |
|
$27.2 |
|
WBA |
Walgreens Boots Alliance Inc |
Consumer Staples |
Food & Staples Retailing |
Not Rated |
|
$81.8 |
|
CPB |
Campbell Soup Co |
Consumer Staples |
Food Beverage & Tobacco |
Sell |
$35.0 |
$39.2 |
|
GIS |
General Mills Inc |
Consumer Staples |
Food Beverage & Tobacco |
Neutral |
$46.0 |
$45.7 |
|
HRL |
Hormel Foods Corp |
Consumer Staples |
Food Beverage & Tobacco |
Not Rated |
|
$45.3 |
|
HSY |
Hershey Foods Corp |
Consumer Staples |
Food Beverage & Tobacco |
Sell |
$88.0 |
$108.7 |
|
SJM |
Smucker J.M. Co |
Consumer Staples |
Food Beverage & Tobacco |
Not Rated |
|
$114.2 |
|
STZ |
Constellation Brands Inc A |
Consumer Staples |
Food Beverage & Tobacco |
Not Rated |
|
$202.0 |
|
TSN |
Tyson Foods Inc A |
Consumer Staples |
Food Beverage & Tobacco |
Not Rated |
|
$61.6 |
|
CLX |
Clorox Co |
Consumer Staples |
Household & Personal Products |
Sell |
$110.0 |
$161.1 |
|
KMB |
Kimberly-Clark |
Consumer Staples |
Household & Personal Products |
Sell |
$90.0 |
$110.4 |
|
EQT |
EQT Corporation |
Energy |
Energy |
Not Rated |
|
$34.6 |
|
PNC |
PNC Finl Services Group |
Financials |
Banks |
Neutral |
$137.0 |
$132.8 |
|
AMG |
Affiliated Managers Grp |
Financials |
Diversified Financials |
Not Rated |
|
$112.6 |
|
BLK |
BlackRock Inc |
Financials |
Diversified Financials |
Buy |
$505.0 |
$405.4 |
|
IVZ |
Invesco Ltd |
Financials |
Diversified Financials |
Neutral |
$23.0 |
$20.5 |
|
SYF |
Synchrony Financial |
Financials |
Diversified Financials |
Neutral |
$32.0 |
$27.2 |
|
MMC |
Marsh & McLennan Companies |
Financials |
Insurance |
Neutral |
$87.0 |
$87.2 |
|
ABC |
AmerisourceBergen Corp |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
$89.9 |
|
LH |
Lab Corp of America Hldgs |
Health Care |
Health Care Equipment & Services |
Not Rated |
|
$167.5 |
|
CELG |
Celgene Corp |
Health Care |
Pharmaceuticals, Biotechnology & Life Sciences |
Buy |
$94.0 |
$71.0 |
|
GD |
General Dynamics |
Industrials |
Capital Goods |
Neutral |
$210.0 |
$181.0 |
|
ITW |
Illinois Tool Works Inc |
Industrials |
Capital Goods |
Neutral |
$136.0 |
$131.2 |
|
MAS |
Masco Corp |
Industrials |
Capital Goods |
Not Rated |
|
$30.6 |
|
MMM |
3M Co |
Industrials |
Capital Goods |
Neutral |
$211.0 |
$197.0 |
|
SWK |
Stanley Black & Decker |
Industrials |
Capital Goods |
Buy |
$173.0 |
$122.0 |
|
AAL |
American Airlines Group Inc. |
Industrials |
Transportation |
Not Rated |
|
$36.9 |
|
UPS |
United Parcel Service Inc B |
Industrials |
Transportation |
Buy |
$136.0 |
$107.7 |
|
MCHP |
Microchip Technology Inc |
Information Technology |
Semiconductors & Semiconductor Equipment |
Not Rated |
|
$69.7 |
|
MU |
Micron Technology Inc |
Information Technology |
Semiconductors & Semiconductor Equipment |
Neutral |
$52.0 |
$37.4 |
|
EMN |
Eastman Chemical Co |
Materials |
Materials |
Buy |
$112.0 |
$81.6 |
|
PPG |
PPG Industries Inc |
Materials |
Materials |
Buy |
$123.0 |
$105.4 |
|
SEE |
Sealed Air Corp |
Materials |
Materials |
Buy |
$45.0 |
$35.0 |
|
FRT |
Federal Realty Invt Trust |
Real Estate |
Real Estate |
Not Rated |
|
$128.5 |
|
IRM |
Iron Mountain Inc |
Real Estate |
Real Estate |
Not Rated |
|
$32.7 |
|
VTR |
Ventas Inc |
Real Estate |
Real Estate |
Not Rated |
|
$60.2 |
|
WY |
Weyerhaeuser Co |
Real Estate |
Real Estate |
Not Rated |
|
$27.0 |
|
DUK |
Duke Energy Corp |
Utilities |
Utilities |
Buy |
$92.0 |
$85.9 |
|
|
|
|
|
|
|
|
|
Source: FactSet, UBS Note: stocks are selected using quantitative criteria based on key themes, and the results may differ from analyst recommendations.
US Equity Strategy 13 November 2018 |
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