- Investors have gone fully risk-on in 2023, but Evercore ISI says more market volatility is coming.
- Julian Emanuel suggests investors look for high-cash flow stocks that the market is underestimating.
- Emanuel says that market turmoil is on the way even if the Fed pauses its rate hikes soon.
Somehow meme stocks have returned.
January tends to be “opposite day” on the stock market, as investors often spend the month buying whatever assets did the worst the year before in the hopes that poor performers will rebound. That was definitely the case last month and in early February, when investors snapped up tech and growth stocks after dumping them throughout 2022.
As of Tuesday, the S&P 500 has jumped about 8.5% in 2023, and the tech-heavy Nasdaq composite had surged almost 16%. Even bitcoin is up nearly 40%. So, of course, meme stocks are back too.
But the latest rally in growth, tech, and meme stocks isn’t just about buying beaten-up equities for cheap. Investors are betting that the Federal Reserve is going to stop raising interest rates soon, and they’re getting more optimistic about the trajectory of the economy, concluding that a recession might not be on the way after all.
Julian Emanuel, who leads Evercore’s research teams focusing on equity, derivatives, quantitative strategy and portfolio strategy, wrote in a recent note to clients that call option volume has spiked to an all-time high, above the January peak from the 2021 meme stock moment.
He suggests that might be a contrarian indicator. While he expects the Fed to “pause” rate hikes in March, it won’t necessarily play out the way a lot of investors now expect.
“A potential “Pause” does not guarantee immediate and sustained upside, but invariably more volatility – especially as signs of an economic slowdown accrue,” he wrote.
If investors’ faith is shaken again, it stands to reason that riskier assets will get hit the hardest, which is what happened in 2022. And just like last time, the investment cases in the loosely-defined meme stock field range from “very speculative” to “lolwut.” So to say the least, it remains a volatile and risky area.
Emanuel says investors can take a different path to investing in growth assets — not as high-reward as a meme stock that might pop 90% in a few weeks, but less likely to implode.
“Stocks which exhibit solid growth momentum and high Free Cash Flow yield (a Value attribute) are seen as insulation against a potential downturn, and those with high short interest could Outperform,” he wrote. “While Staples, Discretionary and Health Care historically outperform in such an environment and Energy is an in-line performer, true alpha generation remains tethered to the idea of the Stockpicker’s market.”
Emanuel says the stocks below have “valmentum,” meaning their high free-cash-flow yields make them strong value investments that should perform well in an economic downturn, while their growth is on a good trajectory — meaning analysts have been raising their profit projections for the companies and expect them to report overall profit growth in 2023.
The following 26 stocks also have high short interest compared to their averages. That implies investors are more bearish on the stocks than normal, which means the stocks could have extra upside if they perform the way analysts think they will.