UBS Adds Top New Stocks to Buy to Its U.S. Equity Focus List

We like to keep a close eye on the focus lists and conviction lists of the major firms that we cover on Wall Street. Typically stocks that are added and removed from these lists have strong catalysts that are driving the underlying fundamentals of the stocks. The UBS Equity Focus List integrates intellectual capital expertise across multiple research disciplines within the UBS Chief Investment Officer (CIO) Wealth Management Research team. This ultimately becomes a list of stocks that is designed to outperform the broad U.S. equity market.

Earnings results were a major performance driver for the UBS list in the past month. Some 76% of the stocks on the list beat earnings estimates. This compares with 71% of the companies in the S&P 500. The average company on the list beat earnings by 5.1%, versus the average 2.7% beat by the S&P 500 companies. Clearly the stocks to buy on the UBS list are outperforming. Here are the top new stocks to buy on the list. We also have mention the stocks that were removed.

Agilent Technologies Inc. (NYSE: A) makes its debut on the UBS list. Agilent was added in order to increase the exposure to a potential rebound in capital spending. In addition, the planned separation of the company into a more defensive life sciences business and more cyclical electronic measurement company has the potential to improve valuation. Investors are paid a 0.9% dividend. The Thomson/First Call price target for the stock is $57.50. Agilent closed Thursday at $50.76.

American Express Co. (NYSE: AXP) is well positioned to benefit from an expected improvement in global economic growth and a pickup in global corporate profits. In addition, the company is seeing strong credit card usage from its high net worth clientele. This could bode well with the busy holiday shopping season almost upon us. Investors are paid a 1.1% dividend. The consensus price target for the stock is $82, though the stock closed Thursday at $81.80.

Boeing Co. (NYSE: BA) is another top performing name added to the UBS list. Despite its outstanding performance this year, the UBS team thinks that there is additional strong upside for the stock. They are forecasting 20% annual growth in free cash flow through 2017. Investors are paid a 1.5% dividend. The consensus price target for the stock is posted at $142, and Boeing closed Thursday at $130.50.

The names that were removed from the UBS list have been strong performers. However, UBS is lowering its allocation to consumer discretionary stocks and rotating away from financials that are more retail based. PetSmart Inc. (NASDAQ: PETM) and Wells Fargo & Company (NYSE: WFC) were both removed from the UBS list. We would point out that PetSmart also was downgraded to Neutral from Buy at Bank of America Merrill Lynch on Friday.

The UBS research team remains very positive on U.S. stocks going forward. Although valuations have lifted, they remain reasonable at under 15 times forward operating earnings. The key for investors now is to move away from the momentum names that have become irrationally expensive and focus on stocks with strong fundamentals and earnings growth.