Wells Fargo, Bank of America, and FedEx Are Too Popular With Investors. Other Stocks Could Pop, Citi Says.
FedEx is one of the stocks that could be overheated.
Christopher Dilts/Bloomberg
Looking at stocks that money managers have bought and off-loaded, one theme has become clear to Citigroup analysts: Value stocks are still outperforming growth stocks.
Growth stocks—often shares of innovative technology companies—have earnings drivers that can power through economic turbulence, and are often favored when growth expectations are low. Value stocks are more affected by the economy, so they can be popular when the economy is recovering.
Investors have been favoring value lately, in anticipation of an economic expansion fueled by stimulus and Covid-19 vaccine distribution. Since Sept. 23, the Russell 1000 Value Index is up 23%, outpacing the Russell 1000 Growth Index’s 16% rise and the S&P 500’s 17% advance.
Value’s outperformance can continue for now, argued the Citigroup strategists in a Tuesday note. They expect investors to continue rotating out of growth stocks and into value stocks. In the near term, “growth remains the most crowded factor,” they wrote, so “the rotation around growth versus value continues.” They also noted that there are plenty of value stocks among the ranks of the crowded and less-crowded investments.
The Citi analysts created a score for each stock to reflect how much of the stock is held by institutional funds and how many funds own it, as well as “crowding” metrics; crowded stocks have low short interest and relatively high earnings multiples. The more crowded a stock, the more likely it is to drop soon, they argue. The less crowded, the more likely it is to pop.
Bank of America (BAC) is highly crowded and due to face some near-term pressure, in their view. The stock has a 0.65 holding score on a zero-to-one scale, with one reflecting high ownership levels. Its crowding score is 0.66 on a zero-to-one scale.
Investors have bought up the bank’s shares, sending them up 20% in the past month. The yield curve has steepened sharply, meaning long-term yields have soared while short-term rates remain low, and that is seen as a boon to bank profitability. The rise in long-term Treasury yields has been fueled by rising inflation expectations, as investors see Democratic control of Congress as a reason to expect more fiscal stimulus. Bank of America also has earnings upcoming, a key catalyst that could still move the stock higher.
Wells Fargo (WFC) is crowded as well, Citi wrote, after also gaining 20% in the past month. Its holding score is 0.79, while its crowding score is 0.33.
FedEx (FDX), an economically-sensitive stock levered to stimulus, is on the crowded side. It’s down in the past month, but still up 120% since the stock market’s March 23 trough. Its holding score is 0.71 and its crowding score is 0.44.
Humana (HUM) and Salesforce (CRM) are two other crowded trades. Their holding scores are 1.0 and 0.95, respectively, and their crowding scores are 0.27 and 0.41.
Citigroup’s strategists recommend investors instead consider stocks that have lower holding and crowding scores. Their list includes:
Vornado Realty Trust (VNO) has a 0.16 holdings score and a 0.23 crowding score and is down 5.5% in the past month.
Utilities company Xcel Energy (XEL) has been left behind and is down 1.5% in the past month. Its holding score is 0.1 and its crowding score is 0.38.
Three other promising stocks cited by Citi are Western Digital (WDC), General Electric (GE) and VF Corp. (VFC). Western Digital has a holding score of 0.31 and a crowding score of 0.65; GE has a holding score of 0.33 and a crowding score of 0.75; and VF has a holding score of 0.04 and a crowding score of 0.63.
Write to Jacob Sonenshine at [email protected]
