The rout in a good number of cyclical stocks amid resurgent COVID-19 infections this past month is overdone and it's time to buy ahead of a coming big rally, contends Goldman Sachs.
"Among U.S. industries, Airlines (19% below its 52-week high) and Hotels (11%) rank among the laggards in recent weeks. If our economic outlook proves correct, these stocks should rebound in coming months. Likewise, the Energy sector trades 12% below where it traded a month ago and our commodity strategists’ bullish forecast for oil suggests those stocks also represent a tactical opportunity," says Goldman Sachs Chief U.S. Equity Strategist David Kostin.
The sell-offs in hotels and airlines in particular have been stark in recent weeks.
While the S&P 500 has powered to new highs over the last month, shares of major hotel chains Marriott, Hilton, Choice Hotels, and Host Hotels have all declined. The worst-performing hotel stock over the last month has been Host Hotels, which has shed 10.5% per Yahoo Finance Premium data.
The weak trading has extended to the airline space, too, despite promising second quarter earnings this month from Delta Air Lines and SouthWest Airlines.
Shares of Delta, Southwest, American Airlines, JetBlue and United Airlines have all shed more than 5% in the past month. United Airlines has sunk 12.5%, making it the worst-performing airline stock in the past four-weeks.
Zooming out to include May, several household name cyclicals have lagged materially on virus concerns. Goldman's data shows, for example, an 11% drop in Boeing's stock since May and a 10% decline in Micron Technology.
Of the 31 Russell 1000 stocks in cyclical industries with 2021 sales growth greater than 25% and positive 2022 sales growth potential, Goldman found a 14% median decline in stock prices going back to May.
Kostin's bullish call on cyclicals stems from a muted stance on the impact to the broader market — and economy — from the fast-spreading Delta variant.
Explains Kostin, "We think the Delta variant should pose a minimal risk to the U.S. equity market. From an economic perspective, widespread vaccinations and strategies focused on containment suggest limited medical and economic downside risk even if infections continue to rise. From a flows perspective, robust household cash balances and corporate buyback authorizations should continue to support inflows for equities, increasing the likelihood that market participants perceive a pullback as a buying opportunity."
The Goldman team estimates household equity demand will total $400 billion this year and U.S. corporations will account for $300 billion through stock buybacks.
Concludes Kostin, "We believe investors should balance tactical positions in virus-exposed cyclicals with longer-term strategic positions in high-quality secular growth stocks."