UBS says to buy these 42 ‘new momentum’ stocks that are poised to outperform in a rising inflation environment

  • Inflation fears rippled through Wall Street to lead Treasuries and growth stocks lower last week.
  • UBS screened for a list of 42 “new momentum” stocks with strong price momentum and earnings outlooks.
  • Chief equity strategist Keith Parker explains why these stocks can outperform amid rising inflation.
  • See more stories on Insider’s business page.

Inflation fears rippled through Wall Street last week.

In the first three days of the past week alone, the Nasdaq was down more than 5% and long-term US Treasuries were down over 2%, according to Bespoke Investment Group. 

The situation was all the more unusual because bonds tend to provide a cushion for investors when growth stocks are selling off sharply. “Going back to 1987, there have only been eight other three-day periods where the Nasdaq was down over 5% and long-term US Treasuries dropped more than 2%,” Bespoke said in a Thursday note

Indeed, higher inflation, which has been reflected in the sharp increases in April Consumer Price Index and Producer Price Index data, could push the

Federal Reserve
to raise interest rates. Higher interest rates have historically negatively affected stock earnings and valuation, weighing especially on long-duration, rate-sensitive growth stocks. 

As inflation expectations rose above 2.5%, Keith Parker, the chief US equity strategist at UBS,  said now is the time to get picky in stocks. 

“We’ve seen in those environments where realized inflation on a six-month basis has hit 3% or above, those stocks with strong pricing power by our measures have outperformed stocks with weak pricing power by an average of 12% over the next 12 months,” Parker said in an interview. “So as inflation is rising and costs are rising, it now comes down to what stocks, what companies can pass along those rise in prices.”

In his view, companies with strong pricing power are also those with higher margins and higher returns on capital. These stocks, which tend to have the strongest upward earnings revisions, highest forward earnings growth, and sales growth, are coined “new momentum” stocks by Parker and his team. 

To identify those stocks, they started by asking UBS analysts to confirm whether stocks that met the initial screening criteria fit the theme of “new momentum” and had more room to run.

The team then filtered for buy-rated stocks that meet their various standards such as (1) above-average 12-month price returns and three-month earnings revision; (2) 12-month forward earnings growth and its acceleration in the top 60%; (3) value outside of the bottom 25% as determined by a composite score of forward earnings yield,

dividend yield
, and book to price; (4) 12-month volatility outside of the top 30%; and (5) market cap above $7 billion. 

The end result is a list of 42 stocks that range from the communication services sector to the real estate sector. These stocks, along with their tickers, sectors, and market caps, are listed below. All price data are as of May 10. 

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