Jefferies says that investors are acting like it’s 2018 or 2020 and buying secular growth stocks. Strategist Steven DeSanctis says that’s a mistake, as the stocks are expensive and facing headwinds. DeSanctis put together a list of hard-hit stocks that he expects to stage a strong rebound. Sometimes the old rules don’t apply anymore, and people who can’t change with the times are setting themselves up for failure.
Jefferies strategist Steven DeSanctis recently warned that a lot of investors are fighting the last war when it comes to preparing their portfolios for a recession. They’re doing so by buying long-term secular growth stocks, as they did at two other pivotal periods in the last few years. It worked out then, but he cautions that it won’t now.
“We think investors are running the ’20 recession playbook and ’18 pivot by rotating back to Secular Growth, but that does not make sense to us,” he wrote in a recent note. “These stocks trade at 40.8x earnings, 3.2x sales, and have seen the biggest cut in ’23 estimates.”
DeSanctis thinks that, instead, investors should look for stocks that are cheaper — particularly companies that will benefit from the weakened US dollar and better global economic growth. He added that cheaper stocks are becoming a very appealing opportunity right now because they’re more than due for a recovery.
“We have seen a large gap in performance not only across size and style but between the haves and havenots,” he wrote. “The best performing quintile is beating the worst by nearly 60 percentage points in Small & Mid thus far this year, and so we started our search across stocks that are down on the year.”
With those ideas in mind, DeSanctis and his team picked out a group of smaller companies that have lost ground this year and are trading at sensible valuations. They also score well on factors Jefferies considers important, like balance sheet strength.
“Small is now back to fair value on our absolute valuation model and 15th percentile on a relative basis,” DeSanctis wrote.
Those 18 buy-rated stocks are ranked below based on how far they’ve declined this year, a reflection of how severely they’ve underperformed. Those year-to-date moves were calculated based on stock prices at midday Friday.