22 stocks for YE rally. Raising S&P 500 YE Target to 4,800 (+100) to reflect "more risk-on-er" environment. Adding auto retail + trucking to "risk-on"

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STRATEGY: Raising S&P 500 YE Target to 4,800 (+100) to reflect “more risk-on-er” environment.  Adding auto retail + trucking to “risk-on”

Cat in Michigan catches COVID-19.  First documented “cat” in Michigan. Animals, the stealth super-spreader?
A cat in Michigan is the first confirmed feline case in the state (see story below) the cat caught COVID-19 from its owner.  State officials noted that nationwide, there have only been 257 confirmed cases of animals catching COVID-19.  This story is light-hearted in tone, but it does raise interesting questions:

– animals do not wear masks
– owners get up close and close enough to catch “respiratory droplets”
– 67% of US households own a pet

– Are pets “super spreaders”?

This is what I am curious about.  Are animals a source of spread?

Apparently WHO and CDC say this does not happen… but isn’t an aerosol an aerosol?
If one consults the WHO and the CDC, both say that there is little risk one gets COVID-19 from animals.  In fact, WHO is categorical — “pets don’t transmit COVID-19.”  But this to me sort of defies common sense:

– if COVID-19 is an aerosol
– then animals can shed COVID-19 

– CDC statement is misleading
– it says we cannot catch it from the “fur, skin or hair of pets”
– but this is fomite instances
– it does not say pets do not shed COVID-19 via aerosol, respiratory droplets

Hmmm.  So, this is sort of a curiosity to me.

BACK TO WORK: Google says offices filling up and reiterates need for interaction
Late in 2020, Google outlined its vision that employees would spend 3 days a week in the office.  And the company recently pushed this deadline to January 2022.  Still, more GOOG 0.36%  are coming back to the office:

– 20-30% in SF area
– 50% in the NYC area

The takeaway is that America is slowly returning to normal.  While I don’t know the exact “end date” for COVID-19, we think that when this happens, we will see much of the pre-COVID-19 routine come back.  This includes:

– business travel
– work in the office
– travel

So, our base case is that we believe the US will return to a very high level of pre-COVID-19 in 2022.  That is also based on the idea that boosters + therapeutics + natural infection will make society less prone to renewed outbreaks.

Demand remains strong but this is not the same as inflation
While there have been deliberate steps to ease the congestion at the port, the backlog continues to build:

– there are now >100 vessels waiting to dock at the Port of Los Angeles and Long Beach
– this was 97 on September 19th
– pre-COVID, this was zero

So, the backlog is growing.  As many have pointed out, this is both a demand and a logistics problem.  There is obviously a lot of port volume (people ordering goods).  But the process of COVID-19 sanitation protocols, plus a shortage of labor and workers is equally a factor.  The takeaway is:

– supply chain glitches are still here
– but this just means the market’s patience will eventually be tested
– if ordering for holiday season, order early

STRATEGY: Market consolidated for 32 days, so “risk on” +7% into YE is not necessarily extraordinary
The S&P 500 is up 20% YTD, but this has been a jagged year of progress.  We have listed the litany of setbacks/headwinds in our prior comments, but the chart below highlights the type of “ping-pong” market seen in 2021:

– S&P 500 has seen 3 periods of consolidation
– 43 days Feb to March –> post-GME debacle and post-Wave 3
– 32 days May to June  –> FANG drawdown, interest rate reversals
– 32 days Sept to Oct  –> Delta-variant hysteria + inflation fears + Washington shutdown

After each of the two earlier episodes, the S&P 500 rallied +7%.  

– curious that it was +7% in each instance
– Into YE, a +7% rally implies S&P 500 4,800

Raising S&P 500 YE Target to 4,800 (+100) to reflect “more risk-on-er” environment
We are formally raising our S&P 500 YE target to 4,800, +100 from our prior 4,700 target.  This implies +7% upside into YE:

– +7% is consistent with the prior rallies in 2021 following consolidations
– YE seasonals are strong, especially as we exit October
– Bitcoin rallying to new all-time highs, in our view, is a signal of a strong risk-on environment
– COVID-19 appears to be tracking better than consensus fears
– Economic resilience remains strong

The future is uncertain. And financial markets are inherently unpredictable.  Thus, one should view our S&P 500 target as merely a directional observation. That said, we believe a strong risk-on environment is underway.  We do not think consensus is that bullish.  We already know that investors got very pessimistic in September.

– recall how often investors cited “stagflation risk”
– many said 2021 patterned itself to 1929
– many investors said the top was in

This negative view could prove to be right.  However, the improvement in market technicals, such as clearing the 50-day moving average, is actually suggesting that underlying trends are getting stronger.


Rationale for S&P 500 4,800…
Our revised YE 2021 target of 4,800 is a P/E of 21.9X 2022E EPS:

– 2021 EPS (Fundstrat)    $193
– 2022 EPS (Fundstrat)    $219
– Implied P/E 2022             21.9X

That is not a “cheap” multiple, but we think it is an appropriate TINA multiple:

– 10-yr implied P/E           61X
–  Investment grade         41X   (2.43% yield)
–  High-yield (BofA)          23X  (4.29% yield)

So, a 22X P/E is even cheaper than high-yield aka junk bonds.

Adam Gould, Head of Quant AI Strategy, also notes this implies an excess equity residual income premium of 2.8%.  This, in his parlance, is not demanding.  

Mark Newton says S&P 500 4,768 is a 100% return projection from the May low.

So, you can see that S&P 500 4,800 is achievable and not necessarily causing anyone to make “stretch assumptions.”


TACTICAL: Adding Automotive Retail + Trucking to “risk-on” –> Energy + Homebuilders + these two industries
Over the 10 days or so, we have have been progressively pushing our view into the “risk-on” mode and with the recent strength in both Bitcoin (BTC BITO 4.14% ) and equities (SPY -0.04% ), we see a stronger risk-on environment.  Thus, we want to add two additional sectors for a “seasonal bet”:

– Seasonal bet means industries with a high win-ratio from October to May
– Homebuilders was already discussed this week, as has Energy

– Automotive retail is another strong group
– Trucking is seasonally strong October to May

Both automotive retail and trucking are “epicenter” groups — they benefit from a pro-cyclical environment and are also reflationary trades as well.  Thus, we see these groups as working at a time if one is both risk-on and believes the economy is strengthening.  We think this makes sense from today into YE

22 YE RALLY STOCKS:  Stocks that Mark Newton sees “strong into YE”
We wanted to identify some individual stocks to own into YE.  Our data science team, led by tireless Ken, have identified 4 groups we want to own into YE.  And we asked Mark Newton, Head of Technical Strategy, to identify the strongest stocks technically:

4 key industries into YE:

– Automotive retail   “risk-on” seasonal
– Trucking                “risk-on” seasonal
– Homebuilders        “more risk-on” seasonal
– Energy                   “more risk-on-er” seasonal

Here are the 22 stocks that Mark Newton sees as strongest Technically:

Automotive Retail:
ORLY -0.65%
AZO -1.39%
AAP 0.36%
GPC 1.46%
CPRT -0.27%

Trucking:
SAIA -1.86%
ODFL -1.63%
JBHT -0.72%
TFII
LSTR -0.23%

Homebuilders:
LEN -0.56%
BLDR 0.25%
TPH
ATKR 0.22%
HD -1.60%
LOW -0.87%

Energy:
FANG -0.70%
DVN -0.44%
AR 0.39%
FSLR -0.79%  (solar)
SEDG 5.38%  (solar)

FYI, check out the FCF yields of the Energy stocks.  

– FCF yields of 22% to 32%
– whoa
– Energy surely doesn’t seem expensive

26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 79,946, down -39,386 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 79,946 vs 116,332 7D ago, down -39,386
• Daily cases ex-FL&NE 79,946 vs 113,305 7D ago, down -36,359
• 7D positivity rate 5.1% vs 5.6% 7D ago
• Hospitalized patients 52,960, down -8.8% vs 7D ago
• Daily deaths 1,153, down -32.3% vs 7D ago

*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 79,946, down -39,386 vs 7D ago. Tuesday’s 7D delta is once again negative, as Columbus Day distortion is largely cleared out. As seen below and emphasized by the consistently negative 7D deltas, cases are currently rolling over. 

Rolling 7D delta in daily cases once again negative…
The rolling 7D delta is once again negative as the Columbus Day distortion is largely cleared out.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their recent peak daily cases divided by the daily cases when their case surges started.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days during the recent case surge; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over 
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over 

POINT 2: VACCINE: vaccination pace trending up once again…

Current Trends — Vaccinations: 

• avg 0.8 million this past week vs 0.8 million last week
• overall, 56.6% fully vaccinated, 65.4% 1-dose+ received

Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent. 

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC). 

– Currently, all states are near or above 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, SD, KY are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%/100%. As you can see, all states have reached combined infection & vaccination >100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated).

There were a total of 606,915 doses administered reported on Tuesday, up 21% vs. 7D ago. While we are seeing the vaccination pace slow down, we believe it may soon pick back up as booster shots are becoming more widely available. Also, the same catalysts remain in place:

– Proof of vaccination required by many US cities and venues
– Booster shots
– Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
– Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

73.9% of the US has seen 1-dose penetration >60%… 
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated.  However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 97.2%. And only 81.6% of US (by state population) have seen 50% of its residents fully vaccinated.

We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 98.7% of US states have seen 1 dose penetration >50%, 90.6% of them have seen 1 dose penetration >55% and 73.9% of them have seen 1 dose penetration > 60%.

This is the state by state data below, showing information for individuals with one dose and two doses.

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~8 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

In total, 405 million vaccine doses have been administered across the country. Specifically, 217 million Americans (66% of US population) have received at least 1 dose of the vaccine. And 188 million Americans (57% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.


CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities. 

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.