David Paul Morris/Bloomberg
The meek rarely inherit much of anything—except on Wall Street, when bruised and shunned stocks sometimes surge higher simply because they have failed to keep pace.
The tendency of stocks to snap back after they have lagged benchmark indexes, or underperformed their sector, is such a time-honored fact that it could be accurately described as a permanent part of the smart investor playbook. Alas, timing is everything, and so is an understanding of the fundamentals of the laggards.
As first-quarter earnings season kicks off, Goldman Sachs is advising clients to focus on selected stocks that have lagged the
by an average of 6% over the past month and an average of 8% over the past three months. The Goldman analysts who cover each company have higher earnings estimates than the Street’s consensus estimate.
Goldman’s laggard list is surprisingly varied. It includes
(ticker: ATVI),
(APD),
(CF),
(CHTR),
(EIX),
(ENPH),
(RE),
(FISV),
(GPN),
(ICE),
(LEG),
(MCK),
(TEL), and
(TMUS).
The stocks’ underperformance could prove attractive to investors at a time when the market’s indexes are dancing around record highs (again) and so many stocks are trading at the top of their ranges (again).
The bank’s derivatives strategists advised clients to consider buying call options that expire in May with strike prices that are just above the underlying stock’s price—in options jargon, slightly out-of-the-money calls—and expirations that cover earnings reports while providing enough time for investors to bullishly rerate the stocks should facts merit.
Consider T-Mobile ahead of May 4 earnings. Goldman analyst Brett Feldman has advised clients that T-Mobile should report net phone additions of 575,000, compared with the consensus estimate of about 500,000. His bullishness is predicated on increased T-Mobile promotional activity and a belief that deals encourage customers to switch carriers, among other factors. Feldman also contends the company has a head start in deploying 5G coverage. The bank advised buying the May $130 calls for $4.75 when the stock was at $130.79.
When the stock was at $129.90, the May $130 call cost $4.10. If the stock is at $140, the call is worth $10. Should the stock be below the strike price at expiration, the trade fails. During the past 52 weeks, T-Mobile has ranged from $85.81 to $135.54. The stock is down 3.7% this year and up 47% over the past year. The S&P 500 is up 9.8% this year and 48% over the past year.
The release of quarterly earnings is always a time of truth or consequences, but this quarter is arguably even more so. The Covid-19 pandemic appears to be under control, the U.S. economy is expected to grow at an historically high rate, and many people likely see the recent release of stimulus checks as free cash to buy stuff, including stocks.
Trading menus like Goldman’s are intriguing, especially when so many other names have advanced. The challenge is trying to decipher why the stocks have fallen.
The recent declines of some market leaders after they reported incredible earnings indicate that expectations are so high that there is some merit in focusing on stocks that have low expectations due to recent underperformance. More aggressive investors could even consider buying upside calls on battered names—just in case the meek see a bold run-up.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
Email: editors@barrons.com
