Deep Dive: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022

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At the midpoint of 2022, investors are looking at a remarkable change in stock valuations.

The S&P 500 SPX has declined 20%, but the benchmark index’s forward price-to-earnings valuation has fallen by 24% because future earnings estimates have continued to increase. In other words, the S&P 500 has gotten cheaper.

Analysts expect the stock market to roar back — especially three sectors.

Below are lists of favored stocks within those sectors, as well as the energy sector, which stands out with a decline in price-to-earnings (P/E) valuations despite rising 37% this year.

Here’s a summary of the 11 sectors of the S&P 500, with prices and median price targets among analysts polled by FactSet, weighted by market capitalization, as of the close on June 28:

S&P 500 sector 12-month upside potential based on weighted median price targets Price change – 2022 through June 28 Forward P/E Forward P/E – Dec. 31 Decline in forward P/E
Consumer Discretionary 43% -32% 24.3 33.0 -26%
Communication Services 42% -30% 15.4 20.9 -26%
Information Technology 37% -26% 19.7 28.1 -30%
Financials 30% -18% 11.4 14.7 -22%
Materials 29% -17% 12.8 17.0 -25%
Industrials 28% -17% 16.3 20.6 -21%
Real Estate 24% -21% 18.3 24.2 -25%
Energy 24% 37% 8.7 11.0 -21%
Health Care 19% -10% 16.0 17.2 -7%
Consumer Staples 15% -7% 20.1 21.8 -8%
Utilities 14% -3% 19.5 20.8 -6%
Full S&P 500 30% -20% 16.4 21.5 -24%
Source: FactSet

Some notes about the sector data:

  • The three sectors for which analysts see the most upside are consumer discretionary, communication services and information technology. Of those three, only the tech sector has had forward P/E valuations contract more than the weighted price has dropped. (The forward P/E valuations are based on rolling 12-month earnings-per-share estimates.)
  • The energy sector is the only one that is up so far in 2022. But the rise in oil prices has driven such a high increase in earnings estimates that the sector’s forward price-to-earnings valuation has declined 21%.

If you are convinced that a particular sector or group of sectors is likely to perform well, one easy way to ride along is with an exchange traded fund designed to mirror its performance.

The SPDR series of ETFs, managed by State Street Global Advisors, are popular and designed to track the performance of each of the 11 sectors of the S&P 500. They include:

  • Consumer Discretionary Select Sector SPDR Fund XLY — $14.6 billion in assets under management.
  • Communication Services Select SPDR Fund XLC — $9.4 billion.
  • Technology Select SPDR Fund XLK — $38.6 billion.
  • Energy Select SPDR Fund XLE — $33.6 billion.

This isn’t to say that the SPDR sector funds are your only choice. Vanguard and iShares, for example, offer sector funds using different methodologies to track segments of broader indexes.

Analysts’ top stock picks

Here are analysts favorite stocks within the consumer discretionary, communications services and technology sectors, based on percentages of “buy” or equivalent ratings, followed by the energy sector, which has been added because of its decline in P/E valuation even as it has risen 37% this year.

Consumer discretionary

Here are analysts’ 10 favorite consumer discretionary stocks in the S&P 500, sorted by share of “buy” or equivalent ratings:

Company Ticker Share “buy” ratings Closing price – June 28 Consensus price target Implied 12-month upside potential
Caesars Entertainment Inc. CZR 94% $42.97 $99.13 131%
Amazon.com Inc. AMZN 92% $107.40 $175.49 63%
Bath & Body Works Inc. BBWI 90% $29.00 $63.06 117%
TJX Cos. Inc. TJX 83% $57.48 $75.32 31%
Hasbro Inc. HAS 81% $84.19 $111.00 32%
Tapestry Inc. TPR 78% $32.22 $45.46 41%
General Motors Co. GM 77% $33.99 $57.64 70%
Penn National Gaming Inc. PENN 76% $31.79 $55.58 75%
LKQ Corp. LKQ 75% $49.94 $63.75 28%
Nike Inc. Class B NKE 74% $102.78 $142.04 38%
Source: FactSet

Click on the tickers to begin your own research about any of the companies.

And you should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

Communications

Here are analysts’ 10 favorite stocks in the S&P 500 communications sector, by percentage of favorable ratings:

Company Ticker Share “buy” ratings Closing price – June 28 Consensus price target Implied 12-month upside potential
Alphabet Inc. Class A GOOGL 98% $2,240.15 $3,190.74 42%
Match Group Inc. MTCH 91% $71.81 $118.67 65%
T-Mobile US Inc. TMUS 91% $133.03 $170.63 28%
Take-Two Interactive Software Inc. TTWO 81% $126.18 $176.54 40%
News Corp. Class A NWSA 80% $15.49 $28.04 81%
Electronic Arts Inc. EA 76% $122.88 $153.21 25%
Meta Platforms Inc. Class A META 74% $160.68 $283.54 76%
Walt Disney Co. DIS 73% $95.92 $141.61 48%
Dish Network Corp. Class A DISH 68% $18.13 $39.60 118%
Live Nation Entertainment Inc. LYV 65% $84.38 $125.85 49%
Source: FactSet

Technology

The S&P 500 information technology sector ranked third on the list, above, with analysts seeing 37% upside potential, based on FactSet’s weighting of median price targets. Here are the analysts’ 10 favorite names in the sector, by percentage of “buy” or equivalent ratings:

Company Ticker Share “buy” ratings Closing price – June 28 Consensus price target Implied 12-month upside potential
Microsoft Corp. MSFT 95% $256.48 $352.92 38%
ServiceNow Inc. NOW 94% $473.44 $631.29 33%
EPAM Systems Inc. EPAM 93% $311.51 $429.15 38%
Monolithic Power Systems Inc. MPWR 92% $397.13 $567.56 43%
Intuit Inc. INTU 91% $386.29 $515.00 33%
Salesforce Inc. CRM 90% $171.46 $243.89 42%
Mastercard Inc. Class A MA 89% $318.29 $430.19 35%
Visa Inc. Class A V 89% $198.12 $265.75 34%
Micron Technology Inc. MU 89% $57.86 $96.74 67%
Broadcom Inc. AVGO 88% $498.45 $697.52 40%
Source: FactSet

Energy

Even though this sector has soared this year, with a 37% gain, its forward P/E has declined by 30%. Here are analysts’ 10 favorites energy stock in the S&P 500, by percentage of favorable ratings:

Company Ticker Share “buy” ratings Closing price – June 28 Consensus price target Implied 12-month upside potential
Diamondback Energy Inc. FANG 88% $129.80 $183.20 41%
Schlumberger NV SLB 87% $36.97 $50.40 36%
ConocoPhillips COOP 81% $95.22 $131.21 38%
Phillips 66 PSX 79% $88.85 $116.06 31%
Marathon Petroleum Corp. MPC 78% $88.69 $117.25 32%
Halliburton Co. HAL 75% $33.19 $46.42 40%
Valero Energy Corp. VLO 75% $116.25 $139.31 20%
Pioneer Natural Resources Co. PXD 73% $235.33 $309.77 32%
Baker Hughes Co. Class A BKR 71% $30.07 $40.99 36%
Williams Cos. Inc. WMB 71% $31.74 $38.14 20%
Source: FactSet

More midyear coverage:

This article was originally published by Marketwatch.com. Read the original article here.

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