Citi selects quality growth stocks in this downturn

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Citi says investors should still look for quality stocks in the face of the Fed’s rate hike cycle and a possible recession.

“Granted, stocks with high-quality attributes have not been immune to volatility this year,” wrote strategist Scott Chronert in a note. “Why? Essentially, the attributes of the quality factor do not completely isolate a stock from multiple contraction, sector performance momentum, or company-specific fundamental disruption.”

“Nevertheless, they can limit the volatility of a single stock relative to alternatives,” Chronert said. “Furthermore, the stability of the economic model should provide some performance respite from macroeconomic and rate policy concerns, while participating on the upside, should the broader market average return to the upside.”

We “review some recent trends and characteristics of quality factor performance, and incorporate two screens of Citi Buy-rated stocks where a multiple contraction combined with quality characteristics is set up for buying opportunities.”

The first screen is the stocks listed for buy in the Russell 1000 (IWB) with the following characteristics:

  • First quartile by standard deviation of low cash flow growth (10 years, annual)
  • Positive cash flow CAGR over 10 years
  • P/E currently -10% below 5-year average (plus absolute P/E below 50)

Inventories by sector are:

Communication Services (XLC)

  1. DISH Network (DISH), current P/E 6, 5-year average P/E 13.9, 10-year CAGR 20.7%, 10-year standard deviation 2.4%
  2. Alphabet (GOOG) (GOOGL), 20.1, 29, 11.5%, 20.2%
  3. Omnicom Group (OMC), 11.1, 12.8, 20%, 4%
  4. Sirius XM (SIRI), 17.8, 29.4, 18.4%, 14.2%
  5. AT&T (T), 7.5, 9.6, 11.2%, 1.9%
  6. Warner Bros. Discover (WBD), 7.1, 10.5, 19.7%, 9.6%

Consumer Discretionary (XLY)

  1. Advance Auto Parts (AAP), 16.4, 20.2, 21.5%, 3%
  2. Domino’s Pizza (DPZ), 25.5, 35.1, 15.1%, 15.6%
  3. GM (GM), 5.2, 7.5, 19.5%, 6.4%
  4. Home Depot (HD), 18.2, 23, 12.9%, 9.6%
  5. Ross Stores (ROST), 19.2, 34.5, 15.8%, 7.8%
  6. Estee Lauder (EL), 31.3, 40.2, 22.7%, 13.5%

Finance (XLF)

  1. Capital One (COF), 4.4, 13.2, 13.5%, 5.2%
  2. Synchrony Financial (SYF), 4.4, 9.7, 13.2%, 2.6%

Health (XLV)

  1. Charles River Laboratories (LCR), 22, 26.7, 14.3%, 13.9%
  2. Hazard (DHR), 24.1, 30.1, 20.6%, 12.3%
  3. Intuitive surgery (NASDAQ:ISRG), 44.4, 54.6, 20.6%, 12.3%
  4. Medtronic (MDT), 18.2, 21.3, 22.7%, 5.2%
  5. Qiagen (QGEN), 16, 25.6, 18.4%, 10.1%

Industrial (XLI)

  1. Dover (DVV), 16.7, 18.8, 14.4%, 0.5%
  2. IDEX (IDX), 26.5, 31.5, 11.2%, 8.4%
  3. JB Hunt (NASDAQ:JBHT), 20, 25.4, 14.4%, 0.5%
  4. Middleby (MIDD), 16.9, 22.6, 22.1%, 12.5%
  5. Rockwell Automation (ROK), 23.6, 26.3, 17.6%, 7%

Infotech (XLK)

  1. Akamai (AKAM), 17, 21.4, 9.1%, 12%
  2. Genpact (G), 16.9, 19.1, 15.2%, 10%
  3. Mastercard (MA), 35.4, 40.9, 18.6%, 13.2%

Materials (XLB)

  1. Berry Global (BERY), 8.7, 13.8, 15.3%, 17.1%
  2. West Rock (WRK), 11.1, 14.7, 21.1%, 17.3%

Real Estate (XLRE)

  1. American Tower (AMT), 40.5, 57.7, 11.3%, 15.2%
  2. Digital Real Estate (DLR), 26.6, 82.4, 12.5%, 15.4%
  3. Solar Communities (SUI), 49.6, 94.7, 15.2%, 28.3%

The second screen for shares listed for purchase with:

  • First quartile by low debt ratios (average debt to equity, -assets and -capital)
  • P/E currently -10% below 5-year average (plus absolute P/E below 50)

Inventories by sector are:

Communication Services (XLC)

  1. Activision Blizzard (ATVI), current P/E 22.1, 5-year/average P/E 25.2, debt-to-equity ratio 20.2%, debt-to-total capital ratio 16.8%, ratio debt to assets 14.4%
  2. Electronic Arts (AE), 18.3, 23.6, 24.6% 19.8%, 13.6%
  3. Metaplatforms (FB), 14.7, 27.8, 11.9%, 10.6%, 8.9%
  4. Alphabet (GOOG) (GOOGL), 20.2, 29, 11.3%, 10.1%, 8%

Consumer Discretionary (XLY)

  1. Deckers Outdoor (Deck), 14.8, 19..9, 14%, 12.3%, 8.6%
  2. DR Horton (DHI), 4.8, 11.4, 33.5%, 25.1%, 21%
  3. Pulte (PHM), 5.1, 10.1, 33.9%, 25.3%, 21%
  4. Yeti (YETI), 18.1, 33.5, 40.5%, 28.8%, 18.6%

Energy (XLE)

  1. ConocoPhillips (COP), 12.3, 262, 38.1%, 27.6%, 20.1%
  2. Coterra Energy (CTRA), 11.7, 36.6, 29.3%, 22.6%, 16.3%
  3. EOG Resources (EOG), 11.2, 39.9, 24.7%, 19.8%, 14%
  4. Marathon Oil (MRO), 11.2, 62.7, 36.5%, 26.8%, 23.1%
  5. Natural Pioneer (PXD), 13.9, 52.6, 25.5%, 20.3%, 16.3%

Finance (XLF)

  1. Comedy (CMA), 10.1, 12.9, 38.1%, 27.6%, 3%
  2. Financial regions (FR), 8.2, 13, 13.8%, 12.1%, 1.4%

Health (XLV)

  1. Bio-Rad Laboratories (BIO), 33.8, 83.8, 13.9%, 12.2%, 1.4%
  2. Intuitive surgery (ISRG), 44.3, 54.6, 0%, 0%, 0%
  3. Veeva Systems (VEEV), 43.8, 82, 1.9%, 1.8%, 1.4%

Industrial (XLI)

  1. CoStar Group (CSGP), 49.1, 69.3, 19.2%, 16.1%, 15.1%
  2. Ingersoll Rand (RI), 20.1, 22.8, 38.4%, 27.7%, 22.8%
  3. ITT (ITT), 17.5, 20, 27.6%, 21.7%, 15.5%
  4. JB Hunt (JBHT), 19.8, 25.4, 39.9%, 28.5%, 18.4%

infotech (XLK)

  1. EPAM Systems (EPAM), 34.6, 45.2, 8.9%, 8.2%, 6.5^
  2. IPG Photonics (IPGP), 18.9, 39.8, 1.4%, 1.4%, 1.3%
  3. MKS Instruments (MKSI), 10.1, 17.1, 33.9%, 25.3%, 22.1%
  4. Micron (UM), 8.2, 12, 16%, 13.8%, 12%
  5. Universal Display (OLED), 32.4, 70.5, 2.6%, 2.6%, 2%
  6. Teradyne (TER), 17.8, 21, 6.9%, 6.4%, 4.7%

Materials (XLB)

  1. Newmont (NEM), 22.7, 27.7, 29%, 22.5%, 15.6%
  2. Reliance Steel and Aluminum (RS), 6.8, 12.3, 28.5%, 22.2%, 18.4%

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