Sweet 16 Stocks (AMZN, TSLA, AAPL, GOOGL, FB..) Will Lag in 2021 as They Can't Get Any Better - Jefferies

December 17, 2020 9:25 AM EST
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Jefferies’ list of "Sweet 16" stocks have performed extremely strong in 2020, however, their strategist Steven G. DeSanctis believes that these stocks simply “can’t get any better”.

The list consists of Apple (NASDAQ: AAPL), Adobe (NASDAQ: ADBE), Advanced Micro Devices (NASDAQ: AMD), Amazon (NASDAQ: AMZN), Broadcom (NASDAQ: AVGO), Facebook (NASDAQ: FB), Fiserv (NASDAQ: FISV), Alphabet (NASDAQ: GOOGL), Intel (NASDAQ: INTC), Microsoft (NASDAQ: MSFT), Netflix (NASDAQ: NFLX), Nvidia (NASDAQ: NVDA), PayPal (NASDAQ: PYPL), Qualcomm (NASDAQ: QCOM), Tesla (NASDAQ: TSLA), and Texas Instruments (NYSE: TXN).

The analyst argues that the better GDP will lead to broader earnings growth, that helps

"best of the rest". Hence, “Sweet 16” are likely to lag in 2021.

‘“Aneta Markowska, Jefferies' Economist, is looking for US GDP to hit 4.5% next year, rates to rise and the curve to steepen. This indicates better growth ahead, which should lead to broader earnings and sales growth, and thus these stocks may lose some of their luster. We looked at the last 5 years, which is a small and biased sample size, of relative performance of each of these names and the 10-year along with the spread between the 10 and 2-year and the average correlation stood at -0.43 and -0.50, respectively,” DeSanctis said in today’s note.

“We think when earnings and sales broaden, we see performance broaden, and that has been the case over the last few months. We continue to see better earnings growth for the "best of the rest" in '21 with profits rising 22.5% vs. 17% for Sweet 16. There are two things we are watching and that is sales growth is still better for Sweet 16 and numbers have fallen

more for the "best of the rest" from Sept 30.”

Tesla’s addition to S&P 500 could be the “the last big thing for Sweet 16”. In this context, Jefferies expect only a 3-day volume once TSLA gets added to S&P 500 on Friday.

Since the turning point in the recent rally (Sep 02), the “Sweet 16” list is up 3.7% and 1.5% when TSLA - downgraded by Jefferies’ Philippe Houchois to “Hold” last week - is removed. Over the same time frame, the S&P 500 is also up 3.7%, while small caps have leaped 23.5%, notes DeSanctis.

“As everyone is aware, TSLA is being added to the S&P 500 at the close on Friday and will be the biggest addition ever to the index based on dollars. Our electronic trading team estimates that an amazing $74B needs to be bought of TSLA, representing about 118M shares BUT this translates into only 3 days of its trading volume. We have lived through the addition of Yahoo and AOL back in 1999 and this to us has the same fanfare.”

All in all, the analyst believes the market will move to “Growth” at a Reasonable Price, compared to the other scenario - Growth at ANY Price. Most of these stocks are overvalued as, for instance, they are approaching 10x sales, while the entire index trades at 2.7x.

“These stocks remain very crowded, as these names are in over 500 ETFs and owned by nearly 20% of the US based mutual funds,” he concludes.

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Jefferies & Co, Standard & Poor's, Tesla, Earnings