In this piece, we will take a look at the top stocks with improving earnings revisions, P/E ratios, EPS growth, and other indicators according to investment bank UBS.
With the third quarter of the 2024 earnings season underway, Wall Street is dealing with a changing stock market environment. The Federal Reserve has started its interest rate reduction cycle and market watchers are on the lookout for labor market and inflationary indicators to determine whether the Fed will be able to meet its goal of reducing interest rates by an additional 50 basis points by the end of this year.
Simultaneously, the shifting economic climate is also creating changes in the investment environment. High interest rates traditionally do not mean well for certain stock market sectors barring exceptional circumstances. Some sectors that don’t perform well in a high-rate environment include real estate, healthcare, and technology.
For two of these, this has been the case in the 2022 – 2024 Federal Reserve interest rate hiking cycle as well. Starting from real estate, the flagship S&P index’s real estate sector’s annualized three-year return is currently -2.66%. From its peak of 324.75 in December 2021, the index has lost 48.2 points or 14.8%. Similarly, the high-end healthcare and biotechnology sector does not fare well during high interest rates either. Since 2021’s close, the S&P’s pharmaceutical stock index is down by -0.84% while the S&P’s biotechnology index has lost a sizable 12.61%.
This brings us to our third stock market sector, a.k.a, technology. Technology, as you’re likely aware, has seen a lot of investor interest due to the surge in artificial intelligence. Looking at the performance of the S&P’s technology stock index, its performance also mirrors real estate and healthcare stocks before the frenzy around artificial intelligence started. Between 2021’s close and the market’s bottom in October 2022, the index had lost 33%. During the same time period, the real estate, pharmaceutical, and biotechnology stock indexes had lost 34.8%, 12.2%, and 30.5%, respectively. However, market optimism surrounding artificial intelligence has created a clear bifurcation in performance.
As an example, while real estate stocks have gained 29% since the October 2022 bottom and biotechnology stocks have added 25% in value, information technology stocks are up by a whopping 115%. This shows that tech stocks have delivered 4x the returns of both real estate and biotechnology. Driving this is artificial intelligence, with the shares of the world’s premier AI GPU designer up by 690% since OpenAI publicly released ChatGPT.
Looking at these shifts, the next question to ask is which stock market sectors might benefit from the evolving environment moving forward. On this front, investment bank UBS has some insights. In its Equity Compass Report issued in mid-October, the bank identifies key themes and trends for US and global stock markets. Within global and US stock market sectors, the bank has rated only one sector as ‘Most Attractive’. Unsurprisingly, this is the US technology sector which is currently experiencing a sustained surge of investor optimism courtesy of artificial intelligence.
The bank shares several data points to justify its optimism in the US technology sector, and more specifically, artificial intelligence companies. Citing data from the Hugging Face repository, a collection of software development tools, it reveals “an average 200% y/y rise for new AI models and model downloads combined so far in 2024.” UBS is also optimistic about the growing adoption of artificial intelligence in the US business world. AI adoption is key since big technology firms that have invested billions of dollars in AI need it to generate returns on their investment.
As per UBS, data from the Census Bureau’s Business Trends and Outlook (BTOS) survey released in September 2024 shows that AI adoption across the 1.2 million firms tracked was picking up the pace. “In the survey, 5.9% of companies reported using AI as of 3Q24, up from 3.7% in 3Q23,” outlined the bank in its report. Not only did 5.9% of the firms adopt AI, but the survey’s outlook for the next six months revealed that AI adoption across the surveyed population could rise by 2.8 percentage points to sit at 8.7%. Commenting on the implications of the higher adoption, UBS stated that “increasing future adoption will increase visibility on AI monetization, which is consistent with recent comments from leading cloud platforms.” The firms slated to benefit the most from this monetization are those ” with strong footprints in existing customer bases,” believes the bank.
These statements necessitate asking the question of which industries are slated to benefit the most from AI adoption. Fortunately for us, UBS also shares data for the industries currently leading the way with AI adoption and those that could grow adoption in the future. Right now, the information technology and personal services sectors are leading with AI adoption since as of September 2024, their respective adoption percentages were 19.1% and 14.7%. For the next six months, while the same industries are expected to lead the pack in overall AI adoption through their 23% and 19.8% percentages, others are expected to make higher percentage point gains. Two industries that stand out in the report are educational services and the finance and insurance industries.
As per the report, the former is expected to increase its AI adoption by 5.6 percentage points to 18.7% over the next six months from the current value of 13.1%. For the finance and insurance sector, it is expected to mark a 6.2 percentage point jump to 13.4% from the existing AI adoption of 7.2%. Of course, while AI is by far the most popular sector in the market right now, UBS also shares other attractive areas. It outlines that the market “also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
With these details in mind, let’s take a look at the stock stocks that are seeing improving indicators according to UBS.
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Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds invested in the firms.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
33. Dayforce Inc (NYSE:DAY)
Number of Hedge Fund Investors In Q2 2024: 23
Sector: Industrial
Dayforce Inc (NYSE:DAY) is a business software company that enables customers to manage their human resources, payroll, tax, benefits, and other operations. Consequently, its hypothesis is dependent on the state of the labor market and by extension the economy. As a result, it’s unsurprising that the shares have gained a modest 13.9% year to date. In fact, if it weren’t for a 15% share price jump in October, Dayforce Inc (NYSE:DAY)’s stock would be down 1% year to date. So what happened in October? Well, the firm’s fiscal third-quarter revenue and EPS of $440 million and $0.47 beat analyst estimates of $428.3 million and $0.43, and its 2025 midpoint growth guidance of 14.5% also surpassed estimates of 13.1%. Yet, Dayforce Inc (NYSE:DAY)’s fourth quarter guidance miss led to some turbulence as the stock sank by 6% following the release.
Dayforce Inc (NYSE:DAY)’s management is quite optimistic about the demand for its software products. Here’s what they shared during the Q3 2024 earnings call:
“Organizations recognize that adopting a modern and best-in-class HCM system can yield significant benefits. These benefits stem from replacing as many as 12 disparate systems with the Dayforce platform. Drilling down into our sales during the quarter, we did see instances of elongated sales. There was no specific industry or segment where this was more pronounced. However, we continued to have strong confidence in our fourth quarter guidance, underscored by our go live plans, our expanding sales motion to our existing customer base and more full-suite deals. Our Q4 pipeline remains strong, with a coverage ratio of sales opportunities to sales targets of approximately 4x. We believe the pipeline strength is a result of our key growth drivers, including the expansion of the Dayforce platform to include a broad set of HCM offerings, our move upmarket to target and win large customers, building the system integrated channel, which allows us to leverage our partners’ implementation and sales capabilities, and finally, building the foundation to win and serve global clients.”
32. Stanley Black & Decker, Inc. (NYSE:SWK)
Number of Hedge Fund Investors In Q2 2024: 24
Sector: Industrial
Stanley Black & Decker, Inc. (NYSE:SWK) is a global tools and engineered products giant. It caters to the needs of the everyday consumer and large companies. Its global presence and brand name have enabled Stanley Black & Decker, Inc. (NYSE:SWK) to develop sizable financial resources. These are evident through its trailing twelve-month revenue of $15.4 billion and inventory of $4.7 billion. Yet, the industrial and cyclical nature of its end market means that Stanley Black & Decker, Inc. (NYSE:SWK) does well when rates are low and consumer spending is robust. Consequently, the fact that the stock is down 4.9% year to date is unsurprising. The aftermath of Stanley Black & Decker, Inc. (NYSE:SWK)’s third-quarter results was particularly notable as the shares dipped by 8.8%. This came as the firm’s industrial business saw revenue drop by 18% annually to $488 million and revenue dipped by 5% to $3.75 billion and missed analyst estimates of $3.80 billion.
Ariel Investments mentioned Stanley Black & Decker, Inc. (NYSE:SWK) in its Q3 2024 investor letter. Here is what the fund said:
“Several stocks in the portfolio delivered solid returns in the quarter. Shares of Stanley Black & Decker, Inc. (NYSE:SWK) outperformed following robust quarterly earnings results as well as a subsequent increase in full year guidance. The Tools and Outdoor segment posted positive organic revenue growth for the first time since late 2021. Meanwhile, SWK’s transformation initiatives remain on track. The company delivered margin expansion by realizing savings from sourcing initiatives, productivity improvements and cost efficiencies. Though the macroeconomic backdrop remains challenging, management is cautiously optimistic lower interest rates will drive a recovery in consumer demand. We have conviction in SWK’s experienced executive management team and think the balance sheet is well positioned to weather the storm.”
31. Cummins Inc. (NYSE:CMI)
Number of Hedge Fund Investors In Q2 2024: 38
Sector: Industrial
Cummins Inc. (NYSE:CMI) is an American heavy-duty industrial products company that makes and sells a variety of equipment such as engines and powertrains. This leaves the firm vulnerable to a downturn in industrial spending that is typically driven by higher rates and lower activity. However, Cummins Inc. (NYSE:CMI)’s stock has been a standout in 2024 and is up by 36% year to date which is more than 2x the S&P Industrial sector’s 17%. This optimism is partially driven by the firm’s ability to capture benefits from new EPA rules that are expected to go into effect in 2027. These can lead to advanced demand for several Cummins Inc. (NYSE:CMI)’s products in 2025 and 2026 as businesses take advantage of the existing rules to beef up their fleets. Cummins Inc. (NYSE:CMI) is also aggressively investing in clean energy products such as clean diesel and natural gas engines. These could prove to be important for the firm in the long run.
Cummins Inc. (NYSE:CMI)’s management shared details about its clean energy initiatives during the Q2 2024 earnings call:
“Also this quarter, we further progressed our partnership with Daimler Trucks and buses and PACCAR as we completed the formation of joint venture now known as Amplify Cell Technologies, to localize battery cell production in the in the battery supply chain the United States. This included naming the Chief Executive Officer of joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers’ evolving needs.
This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and as part of the appropriations related to the inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions, further showcasing our Destination Zero strategy in action. Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets.”