Daily Brief: Focus On Stocks With Strong Earnings Growth Potential, Says UBS

Daily Brief: Focus On Stocks With Strong Earnings Growth Potential, Says UBS

about 3 years ago3 mins

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A report from investment bank UBS suggests global investors will only have one thing on their agenda in the second half of the year: stocks with the strongest earnings growth.

What does this mean?

Yields on long-term US government bonds are on the rise, which means returns-hungry investors are more likely to buy into them. That might encourage those investors to make room for them in their portfolios by selling off some relatively risky stocks, which UBS reckons will slow down the months-long rally in global stock markets – ultimately leading to lower returns.

Yields have lurched higher this month

Still, UBS says there are still returns to be had. In the near term, those might be found in cheap-looking “value” stocks whose earnings growth is set to rebound from last year. But in the longer term – as investors continue their hunt for earnings growth in favor of cheap valuations – "growth" stocks should reclaim the number one spot.

Why should I care?

Zooming in: When rates rise, investors shift gears.

Between record-low interest rates and negative government bond yields (adjusting for inflation), investors have been seeking out riskier but higher-returning assets. But as yields – and eventually rates – rise, money will become more expensive and stocks less attractive no matter what their price. Instead, investors will have to shift their focus to companies’ “fundamentals” – like sales, profit, and cash flow growth – and take companies’ big promises with a pinch of salt if the numbers don’t back them up.

For you personally: Think long term.

The current sky-high stock market won’t last forever, so you’ll want to make sure you’re investing in companies with earnings growth – and, by extension, a share price – that’ll hold steady for more than just the next couple of quarters. A good way to assess this is to ask yourself if the company is growing its sales faster than the overall industry, or if it has a clear advantage over its competition.

Keep reading for our next story...

Lowe’s Reported Stronger-Than-Expected Results

Lowe’s image

Lowe’s isn’t your garden variety retailer, you know: the DIY giant announced stronger-than-expected quarterly earnings on Wednesday.

What does this mean?

With homeowners spending more time at home than ever last year, there was a leap in demand for tools and timber to spruce up home and garden alike. That much was clear from Lowe’s update: sales in existing stores were up by a higher-than-expected 28% from the same time last year, and the company’s quarterly profit beat analysts’ forecasts.

Lowe’s did strike a cautious note about the year ahead, saying it thinks the overall home improvement market will shrink as life goes back to normal. But the retailer still reckons it’ll gain market share and improve its profit margin no matter what. That’s in stark contrast to nemesis Home Depot, which refused to make a forecast altogether – suggesting it might not have what it takes to catch up with its rival.

Lowes Home Depot
Source: Placer

Why should I care?

For markets: Here’s the slowdown they warned you about.

Lowe’s fortunes are closely tied to the housing market, and there wasn’t good news on that front on Wednesday. New data showed US mortgage applications were down 11% last week compared to the week before, while 30-year mortgage rates hit their highest since September. According to some analysts, the apparent drop in house-buying is down to the recent disruptions in Texas and should be short-lived. But Lowe’s investors weren’t willing to bet on it: they sent the company’s stock down 3%.

Lowes stock
Source: Google Finance

The bigger picture: Some retailers will come out of this stronger than others.

Wednesday was a tough day for other retailers too: mattress company Casper Sleep’s stock dropped 8% after its disappointing earnings release, while Office Depot-parent ODP’s fell 5%. TJX was the outlier: the TJ Maxx owner missed earnings expectations but its stock rose – probably because investors think vaccinated shoppers are poised to return to its stores and give the company a much-needed boost.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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