The defeat in quite a few cyclical stocks amid resurgent COVID-19 infections over the past month has been exaggerated and it’s time to buy ahead of a major rally ahead, Goldman Sachs argues.
“Among US industries, airlines (19% below 52-week high) and hotels (11%) are among the laggards in recent weeks. If our economic outlook proves correct, these stocks should recover in the coming months. Similarly, the energy sector will trade 12% lower than a month ago and the bullish forecast from our oil commodity strategists suggests that these stocks also represent a tactical opportunity,” said David Kostin, Chief US Equity Strategist at Goldman Sachs.
The sale at hotels and airlines has been particularly strong in recent weeks.
While the S&P 500 has hit new highs in the past month, shares of major hotel chains Marriott, Hilton, Choice Hotels and Host Hotels have all fallen. The worst-performing hotel stocks of the past month were Host Hotels, which are down 10.5% a year Yahoo Finance Premium Data.
Weak trade also spread to the airline sector, despite promising second-quarter results this month from Delta Air Lines and SouthWest Airlines.
Shares of Delta, Southwest, American Airlines, JetBlue and United Airlines have all lost more than 5% in the past month. United Airlines is down 12.5%, making it the worst-performing airline stock in the past four weeks.
Zooming out to include May, several well-known cyclical companies have lagged significantly behind virus concerns. For example, Goldman’s data shows an 11% drop in Boeing shares since May and a 10% drop in Micron Technology.
Of the 31 Russell 1000 stocks in cyclical sectors with 2021 revenue growth of more than 25% and positive sales growth potential in 2022, Goldman found a median share price decline of 14% through May.
Kostin’s bullish call for cyclical stocks stems from a subdued stance on the broader market – and economy – impact of the rapidly spreading Delta variant.
Kostin explains: “We think the Delta variant should pose minimal risk to the US stock market. From an economic perspective, widespread vaccinations and containment strategies suggest limited medical and economic downside risk, even as infections continue to increase. of flows, robust household cash balances and corporate buyback authorizations should continue to support stock inflows, increasing the likelihood that market participants will view a downturn as a buying opportunity.”
The Goldman team estimates that demand for household stock will total $400 billion this year and US companies will account for $300 billion through share buybacks.
Kostin concludes: “We believe that investors should balance tactical positions in virus-exposed cyclical stocks with longer-term strategic positions in high-quality secular growth stocks.”