Investing

Top Strategists Say Sell Expensive Tech Giants and Buy Cheap Cyclicals Now

Lee Jackson

Published: July 28, 2020 7:50 am

The technology sector has been on fire this year and seems like the proverbial unstoppable force. That’s the way it seemed in 1999 and 2000 as well, and while the absurd valuations from the dot-com bubble are not as pervasive today as then, the sector is way overbought and expensive. In fact, Facebook, Apple, Microsoft, Amazon, Google and Netflix now account for 27% of the S&P 500 market capitalization, up from 18% at the start of this year.

While it’s a tough decision to sell or even pare down holdings in these market leaders, it is clear that some rotation by money managers already has started. If it really picks up steam, a lot of the big gains those stocks and others have generated may be surrendered.

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New reports from top Jefferies strategists Christopher Wood and Steve DeSanctis suggest lowering exposure to technology and focusing on the top cyclical names, which may be poised to outperform with a pickup in the economy of the rest of 2020 and next year as well. One report noted this:

DeSanctis now looks for cyclicals to outperform over growth and bond proxies, and he pointed out that while these stocks have started to come back to life, they remain very cheap. He also pointed out that the ISM Manufacturing Index has made a bottom, and the trend in earnings and sales revisions has improved faster among the cyclicals. Steven also switched his preference for foreign over domestic and believes that better growth outside of the US could weaken the US dollar. He continues to favor value over growth, and high return on equity names.

The reports suggested 13 stocks as top small and mid-cap cyclicals stocks to rotate to, with all having Buy rating. We chose six of the best-known stocks that have solid upside to the Jefferies price targets. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Deckers Outdoor

This clothing manufacturer makes some of the hottest selling products and could be poised for a solid fall and winter selling season. Deckers Outdoor Corp. (NYSE: DECK) designs and markets footwear and accessories for men, women and children. Deckers sells its products, including accessories such as handbags, headwear and outerwear, through domestic and international retailers, international distributors and directly to end-user consumers both domestically and internationally, through websites, and retail stores under the UGG (73% of revenue), HOKA (14%), Teva (6%), Sanuk (3%) and Koolaburra (3%) brands.

The analysts have championed this company for some time and noted this in a recent report:

Deckers Outdoors is proving exceptionally resilient in navigating COVID, thanks in large part to its strong brands (UGG, HOKA) which are demonstrating robust, channel-agnostic consumer demand. While UGG is typically viewed as a fall/winter brand, UGG’s strong sell-through during COVID helped further legitimize its standing as a year-round brand. In addition, HOKA remains on a path to be a $1B+ brand, and we continue to see L-T growth opptys in hiking/training, int’l and new product categories. We raised our estimates and model F21 and F22 EPS ahead of consensus.

The Jefferies price objective for the shares is $245, and the Wall Street consensus target price is much lower at $214.07. Deckers Outdoor stock closed at $211.12 a share on Monday, up almost 3% on the day.

Lear

This stock has bounced nicely off the March lows but still offers a solid entry point. Lear Corp. (NYSE: LEA) is a supplier of automotive seating and electrical systems. The company generates approximately 75% of its revenue from its seating business, with the remainder attributable to electrical systems.

Lear has made significant strides in its restructuring efforts, and it is the second-largest seating supplier globally. Recently Lear was named a GM Supplier of the Year by General Motors during a virtual ceremony honoring the recipients of the company’s 28th annual Supplier of the Year awards. This is the 19th time Lear has been named a GM Supplier of the Year. As a winner in 2019, Lear’s seating division exceeded GM’s targets for business performance and cultural priority metrics.

Jefferies has a $120 price objective, while the consensus target price is $124.53. Lear stock was last seen trading at $118.97.

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This company remains a favorite across Wall Street, especially if a large infrastructure package emerges. Martin Marietta Materials Inc. (NYSE: MLM) is one of the largest U.S. suppliers of aggregates, with operations across 27 states, Canada and the Bahamas. Its largest concentration is in Texas, comprising approximately a third of its exposure.

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The company remains upbeat on 2020 construction demand and noted that many states with its greatest exposure were well positioned for housing and public nonresidential construction growth.

Investors receive a 0.98% dividend. Jefferies has set its price objective at $267, well above the $239.29 consensus figure. Martin Marietta Materials stock ended Monday’s trading at $228.00.

Teledyne Technologies

This is a perfect swap for more aggressive investors that want to have multiple sector exposure. Teledyne Technologies Inc. (NYSE: TDY) engages in the provision of electronic and communication products for wireless and satellite systems. It operates through the following business segments.

The Instrumentation segment includes monitoring and control instruments for marine, environmental and industrial applications. The Digital Imaging segment offers sensors, cameras and infrared systems.

The Aerospace & Defense Electronics segment provides electronic components, data acquisition, subsystems and communications equipment. The Engineered Systems segment develops and produces electrochemical energy systems and small turbine engines.

The $360 Jefferies price target compares to the $373.75 consensus target. Teledyne Technologies stock closed at $307.29 a share on Monday.

Western Alliance Bancorp

This off-the-radar bank is based in Phoenix and looks poised for a strong second half of 2020. Western Alliance Bancorp (NYSE: WAL) is a bank holding company engaged in the provision of deposit, lending, treasury management, international banking and online banking products and services for businesses.

The company operates through the following business segments: Homeowners Association (HOA) Services, Hotel Franchise Finance (HFF), Public & Nonprofit Finance, Technology and Innovation, Other NBL (National Business Lines) and Corporate and Other.

The company reported second-quarter earnings that were lower than a year ago but better than analysts expected. Net operating revenue for the second quarter of $309.5 million was higher year over year and also exceeded consensus expectations.

Shareholders receive a 2.74% dividend. The Jefferies price objective of $42 is just above the $41 consensus estimate. Western Alliance Bancorp stock retreated over 4% on Monday to close at $36.52.

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Xilinx

This is a good swap for technology investors looking to stay in the sector but take profits on the high flyers. Xilinx Inc. (NASDAQ: XLNX) is a leading fabless supplier of high-density programmable logic devices, which are standard integrated circuits that offer significant advantages over custom logic chips, such as application-specific integrated circuits. They are used extensively in key end markets such as communications.

In the prior quarter, Xilinx reported a profit of $528.43 million. The company also saw revenues increase to $756.17 million. In addition, Xilinx has free cash flow of $1.06 billion as of March 2020. The company’s earnings before interest, taxes, depreciation, and amortization compares well with its peers. Xilinx is scheduled to report again later this week.

Holders of Xilinx stock receive a 1.42% dividend. Jefferies has a $120 price target. The $100.65 consensus target is less than Monday’s $106.81 closing price, which came after a 4% gain for the day.

These six top stocks make sense for investors looking to rotate from high-flying tech momentum leaders to cyclical players that have some overseas exposure. The market is overbought as a whole, so it may make sense to buy partial positions here and see if we don’t pull back some.