Coming up on nine years this March, the current bull market is getting old. But it isn’t dead yet. Despite signs of rising interest rates, labor costs and higher inflation, that appear to have brought volatility back with a vengeance, a number of upside opportunities in some technology stocks, industrials tied to commodities and financials, still exist. Four stocks, specifically, that have strong potential to outperform include Alphabet Inc. (GOOGL), Lam Research Corp. (LRCX), Cummins Inc. (CMI), and Citigroup Inc. (C), according to Barron’s. (For more, see also: Charles Schwab: Volatility Is Back With a Vengeance.)
Since the start of the current market run in March 2009, the S&P 500 Index has delivered a total return of about 383% over those nine years. In comparison, going back to 1926, the average bull market also lasted nine years but returned about 480%. No doubt then, the current run that has fed off of low interest rates, making equities significantly more attractive than bonds, looks to be approaching the end of its life. But the difference in returns between the average bull market and the current one offers a spark of hope that there’s still a little life left in it.
That hope may not be completely in vain as Daniel Chung, CEO at Alger, points out that the yield spread between equities and the 10-year Treasury is currently about 2.9 percentage points, which is 2.3 percentage points higher than it was during the 50 years leading up to the global financial crisis. That means that even though interest rates are starting to rise, they still have a way to go before they make a dent in that yield spread and bonds start to look more attractive than stocks. (To read more, see: The Bull Market Will Last Another Decade: Fundstrat.)
Tech giant and parent company of Google, Alphabet, is up 4.76% year to date (YTD), and trades at a forward price-to-earnings ratio of 22.72. Despite trading at a premium to the S&P 500’s forward P/E ratio of 17.25, a pick up in global growth is especially favorable for tech. The company also has a healthy buffer of cash making it less reliant on borrowing as rates rise.
Lam, which specializes in making machines that are essential in memory chip production, has risen 5.12% since the start of the year and is trading at a forward P/E of 12.03. Like Alphabet, the hardware tech firm will benefit from a pickup in global growth and has a healthy stash of cash. RBC Capital analyst Amit Daryanani has given Lam a price target of $245, 32% higher than its current price, according to Barron’s.
Cummins is down 5.56% so far this year, but trades at an attractive 12.51 forward P/E. As a company that manufactures engines used in mining, it is tied to the price of commodities and thus, will be boosted by rising commodity prices. Cummins is among the top industrial picks of Credit Suisse analyst Jamie Cook, who is predicting a 24% upside for the engine manufacturer.
Citigroup is up 2.76% on the year and trades at 10.33 forward P/E ratio. As interest rates rise, net interest margins, the prime source of bank profits, should widen. Citigroup looks especially attractive because of its potential for dividend payment growth. JPMorgan analyst Vivek Juneja predicts a doubling of Citi’s current dividend payouts by next year.