Despite concerns about a looming recession, some money managers say that stocks are on the brink of a major rally that will be sparked as investors realize the market is fundamentally sound. Neil Hennessy, founder and chief investment officer of the $4.9 billion Hennessy Funds, expects outperformance from four under-the-radar stocks, which are: RH (RH), which was formerly named Restoration Hardware, as well as Trinity Industries Inc. (TRN) American Eagle Outfitters, Inc. (AEO) and Casey's General Stores Inc. (CASY).
Hennessy says "there's tons of money" on the corporate sidelines. "If you look at the balance sheets of the S&P 500, there's over $5 trillion in cash and short-term investments" in those 500 companies. That means they have plenty of ammunition to buy back stock and boost dividends, two major catalysts for the market. In addition, Hennessy argues that investors will quickly get over their concerns about a trade war, recession and the inverted yield curve and will soon start spending again. Hennessy predicts that money coming off the sidelines will push the overall market up sharply in the near term, including fueling the Dow Jones Industrial Average to 30,000, according to a detailed story in Business Insider.
Hennessy says that retailer American Eagle, down about 16% this year and with a low price-to-sales ratio of 0.67, is one stock that will be buoyed by the broader market. A recent in-depth report by Barron's agrees, indicating the stock is dramatically undervalued. The thinking is that analysts may have cut forecasts for retailers like American Eagle too deeply on concerns about the trade war with China. American Eagle has a dominant position as the No. 1 women's jeans brand in the U.S., as well as the No. 1 brand for men between the ages of 15 and 25.
RH, formerly known as Restoration Hardware, could also be due for big gains, per a report by the Wall Street Journal. In June, the home-furnishings company reported earnings that exceeded expectations following weak performance in previous periods. Along with rebranding itself as RH, the company has gone against industry trends and published a print catalog, while adding restaurants and wine bars to its huge retail shops.
Hennessy sees other catalysts for these and other stocks, including low interest rates, high consumer confidence and robust spending from the consumer, who drives two-thirds of the U.S. economy. Along with buybacks and dividend increases, he argues these combined forces will keep stocks surging.