It is not an easy time to make an investment decision. The past two months, Wall Street and Main Street (also known as the real economy) have gone in opposite directions. While stocks remain higher than the March low, the economy continues to be devastated as the coronavirus pandemic spreads.
Recently, however, some of the biggest bears on The Street have revised their views of the direction of the US economy. For example, strategists at Goldman Sachs have reversed their forecast that it would drop to the 2,400 level. They now see downside risks with a maximum of 2750.
The US equity benchmark could rise further to 3,200, they wrote in a May 29 note. "Due to the strong rebound, our previous three-month target of 2,400 is unlikely to be met," strategists wrote last week.
“Supporting monetary and fiscal policies is likely to limit the downward trend to about 10%. Investor positioning fluctuates between neutral and low and is a possible upward catalyst of 5%. ”
If the bullish forecasts of the economic recovery turn out to be correct, then it makes sense that investors look for bargains between stocks whose fate is closely tied to economic growth. To that end, we have shortlisted three sectors that offer good upside potential in the event of a V-shaped economic recovery.
1. Banks
Banks were among the hardest hit sectors in the current economic downturn. Investors shunned them because they feared interest rates near zero and a prolonged recession would depress profitability and increase their bad debts.
JPMorgan Chase & Co. For example, (NYSE 🙂 saw its earnings drop 69% as the company set aside $ 8.29 billion for bad loans – the largest provision in at least a decade – to deal with the impact of COVID- 19 on the economy.
Other reasons investors have been wary of US banks is the possibility of low interest rates over a longer period of time, as the Fed is lifting the corona-hit economy out of recession.
But as the United States and other countries begin to open their economies, some investors are betting that the worst is over for bank shares. The shares of JPMorgan and Citigroup (NYSE 🙂 are our two industry choices. Both participated in last month's rally, up 12% and 17%, closing Wednesday at $ 104.27 and $ 53.34, respectively. And each pays a robust dividend: JPMorgan currently yields 3.64%; Citi delivers 4%.
But even with the recent rise, these quality banks are still significantly below their pre-pandemic levels. Each could offer good value and attractive dividend yields to contrary investors.
2. Industrials
If you are optimistic about a rapid economic recovery then it is also a good time to gain some exposure to high quality industrial stocks like 3M ( NYSE :), which have a very diversified product have margins, strong balance sheets and manageable debt.
The shares of 3M, one of the world's largest industrial conglomerates, are already showing strength. Since the low of March, the share of the St. Paul, Minnesota-based company has gained about 40%. It closed at $ 161.21 yesterday
The creator of a wide variety of things, from Post-it Notes to air filters and N-95 medical masks, takes advantage of the safety and cleansers amid the coronavirus pandemic. Despite the recent recovery, we also like the company's 3.78% annual dividend yield, which looks quite attractive when interest rates are so low.
3. Airlines
Investing in airline shares made no sense since COVID-19 began to spread worldwide. And with the number of cases still growing and there being no vaccine or cure, many continue to avoid this segment. But it is unlikely that the current situation will last forever.
It has risen about a third of its low in mid-March. European airlines have achieved similar benefits.
"It's going to be all right," said Doug Parker, American Airlines Chief Executive Officer (NASDAQ 🙂 at an industry conference last week.
"We're all going to increase enough liquidity. I don't think you'll see anyone fall over in this crisis."
Trading at $ 11.85, the AAL stock has gained more than 11% in the past month.
United States. Airlines have benefited from $ 25 billion in federal aid to fund labor costs, and American is negotiating with the United States Department of the Treasury for a separate loan of $ 4.75 billion, according to a Bloomberg report.
Still, airline shares are actually a bet on a vaccine that health professionals say could be available early next year. In fact, Bill Miller, founder and CIO of Miller Value Partners, has noticed just that: If you don't own the airlines, you're betting against the vaccine.
"People love to fly and don't worry about catching polio or smallpox if there is a vaccine," Miller said at a virtual investor round table hosted by Ariel Investments last month. "If there is a vaccine, all the problems people have with flying are eliminated and these (stocks) come back very, very quickly," he said in a CNBC report.
