Buy these outperforming stocks with room to run, says UBS

UBS has identified a selection of stocks with continued upside potential, even following recent market rallies, based on supportive valuations and strong cash flow return on investment momentum. Utilizing criteria like a 13-week price return exceeding the market by over 5% and positive cash flow return on investment revisions, the firm highlighted Financials, Industrials, and Information Technology as leading sectors. Specific examples, including Broadcom (AVGO), AstraZeneca (AZN), and PepsiCo (PEP), demonstrate significant outperformance against benchmarks and exhibit strong analyst consensus for further appreciation, signaling actionable opportunities for institutional investors.

Analysis

A recent UBS research note highlights a strategy for identifying equities with further upside potential, even after a market rally spurred by comments from the Federal Reserve. The firm's quantitative screen focuses on companies demonstrating both strong momentum and supportive fundamentals, specifically requiring a price return of over 5% relative to the market and positive cash flow return on investment (CFROI) revisions over the past 13 weeks. This methodology identified Financials, Industrials, and Information Technology as the sectors with the highest concentration of such opportunities, at 22%, 20%, and 16% respectively. Specific names highlighted include Broadcom (AVGO), which has outperformed the S&P 500 by over 25% in the last 13 weeks and commands a strong buy consensus from 41 of 43 analysts. Similarly, AstraZeneca (AZN) has outperformed its peers and the broader market, with its U.S.-listed shares up over 23% year-to-date and an LSEG consensus price target implying nearly 25% upside. PepsiCo (PEP) also met the criteria, with a 5.4% relative price return and a 15% gain in the past three months, showcasing that this strategy can uncover opportunities even in names with negative year-to-date performance.

Key Decisions for Investors

• Investors should consider applying a similar screening methodology focused on stocks with both strong relative price momentum and positive fundamental revisions, such as improving cash flow return on investment.
• The specific companies identified, notably Broadcom, AstraZeneca, and PepsiCo, warrant further due diligence as they exhibit significant outperformance and have strong bullish analyst consensus, though the implied upside potential varies significantly.
• Consider overweighting or increasing exposure to the Financials, Industrials, and Information Technology sectors, as the UBS screen indicates these areas host the highest concentration of companies with this attractive momentum and value profile.
• Monitor Federal Reserve policy signals closely, as the accommodative commentary that fueled the recent rally is a key macro factor supporting the continued performance of these momentum-driven stocks.