It’s not an easy time to make an investment decision. Over the past two months, Wall Street and Main Street (aka the real economy) have been moving in opposite directions. While stocks keep pushing higher off the March low, the economy continues showing devastation as the coronavirus pandemic spreads.
Lately, however, some of the biggest bears on The Street have revised their views on the direction of the U.S. economy. Strategists at Goldman Sachs, for example, have rolled back their prediction that the would slump to the 2,400 level. They now see downside risks capped at 2,750.
The U.S. equity benchmark could even rally further to 3,200, they wrote in a May 29 note. “The powerful rebound means our previous three-month target of 2,400 is unlikely to be realized,” the strategists wrote last week.
“Monetary and fiscal policy support limit likely downside to roughly 10%. Investor positioning has oscillated between neutral and low and is a possible 5% upside catalyst.”
If the bullish forecasts about the economic recovery prove correct, then it makes sense for investors to look for bargains among stocks whose fate is closely tied with the economic growth. With that objective, we’ve short-listed three sectors which offer good upside potential in the event of a V-shaped economic recovery.
Banks had been among the hardest-hit sectors in the current economic downturn. Investors shunned them, fearing that interest rates near zero and a prolonged recession would crush profitability and increase their bad debts.
JPMorgan Chase & Co. (NYSE:), for example, saw its profit tumble 69% as the company set aside $8.29 billion for bad loans—the biggest provision in at least a decade—to grapple with the effects of COVID-19 on the economy.
Other reasons investors have been wary of U.S. banks include the possibility of low interest rates over a longer period of time as the Fed takes the corona-hit economy out of a recession.
But as the U.S. and other countries begin opening their economies, some investors are betting that the worst is over for bank stocks. Shares of JPMorgan and Citigroup (NYSE:), are our two picks from the sector. Both have participated in the past month’s rally, rising 12% and 17%, closing Wednesday at $104.27 and $53.34 respectively. And each pays a robust dividend: JPMorgan currently yields 3.64%; Citi yields 4%.
Yet even with the recent surge, these quality banking stocks are still down considerably from their pre-pandemic levels. Each could offer good value and attractive dividend yields to contrarian investors.
If you’re optimistic about a quick economic rebound, then it’s also a good time to gain some exposure to top-tier industrial stocks such as 3M (NYSE:), which have highly diversified product ranges, strong balance sheets and manageable levels of debt.
Shares of 3M, one of the world’s largest industrial conglomerates, are already showing strength. Since the March low, the St. Paul, Minnesota-based company’s stock has gained about 40%. It closed yesterday at $161.21
The maker of a broad range of things from Post-it Notes to air filters and N-95 medical masks is benefitting from the for its safety and cleaning products amid the coronavirus pandemic. Its recent rebound notwithstanding, we also like the company’s 3.78% annual dividend yield which looks quite attractive when interest rates are so low.
Investing in airline stocks hasn’t made sense since COVID-19 began spreading globally. And with the number of cases still growing and no vaccine or cure, many continue to avoid this segment. But the current situation is unlikely to last forever.
The has rebounded by about one-third from the mid-March low. European carriers have made similar gains.
“We’re all going to be fine,” American Airlines (NASDAQ:) Chief Executive Officer Doug Parker was quoted as saying at an industry conference last week.
“We’re all going to raise enough liquidity. I don’t think you’re going to see anybody fall by the wayside in this crisis.”
Trading at $11.85, AAL stock has gained more than 11% in the past one month.
U.S. carriers have taken advantage of $25 billion in federal aid to fund payroll costs, and American is negotiating with the U.S. Treasury Department for a separate $4.75 billion loan, according to a Bloomberg report.
Still, airline stocks are actually a bet on a vaccine which, according to health professionals, could be available early next year. Bill Miller, founder and CIO of Miller Value Partners, has in fact noted just that—if you don’t own the airlines, then you’re making a bet against the vaccine.
“People love flying and don’t worry about catching polio or smallpox, if there is a vaccine,” Miller said last month during a virtual roundtable of investors organized by Ariel Investments. “If there is a vaccine, that will eliminate all the issues people have about flying and these (stocks) will come back very, very quickly,” he was quoted saying in a CNBC report.