Why the market's lowest-quality stocks are embarking upon a rally that should extend for months, according to one Wall Street strategist
- As the stock market continues to cross its fingers that a stimulus package is near, investors are more willing to invest in lower quality stocks, according to CFRA's Sam Stovall.
- "Historically, investors' rotation into low quality stocks has anecdotally indicated an improvement in confidence that the economy will recover, encouraging an investment in companies with questionable financials that may have been priced to go out of business but now might not," said the chief investment strategist.
- Stovall highlighted stocks such as Salesforce, Wynn Resorts, and Charter Communications that rank low on quality but have potential for a strong upside, according to CFRA research.
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As the stock market continues to hope that a deal on a new stimulus is near, investors are showing more willingness to invest in lower quality stocks, according to CFRA's Sam Stovall.
The chief investment strategist wrote in a Monday note that low quality stocks are set to rally for the next few months.
"Historically, investors' rotation into low quality stocks has anecdotally indicated an improvement in confidence that the economy will recover, encouraging an investment in companies with questionable financials that may have been priced to go out of business but now might not," Stovall said. "These companies therefore offer the greatest upside price potential."
Stovall makes the case that there is empirical evidence that this assumption is correct, and also highlights several "low quality" stocks within the S&P 500-where quality is based on the consistency of the company's ability to raise earnings and dividends over the past 10 years-that have "strong-buy" ratings from CFRA. The list includes names such as Salesforce, Wynn Resorts, Laboratory Corporation of America Holdings, and Charter Communications.