Citi screens for quality growth stocks in this pullback

Citi says investors should still be looking for quality stocks when dealing with the Fed rate hike cycle and a possible recession.

“Admittedly, stocks with high-quality attributes have not been immune from this year’s volatility,” equity strategist Scott Chronert wrote in a note. “Why? Essentially, Quality factor attributes do not completely insulate a stock from multiple contraction, sector performance dynamics, or company specific fundamental disruption.”

“Nevertheless, they may limit single-stock volatility relative to alternatives,” Chronert said. “Further, business model stability should provide some relative performance respite to macro and rate policy concerns, while participating to the upside, should the broader market mean revert higher.”

We “look at some recent Quality factor performance trends and characteristics, and incorporate two screens of Citi Buy-rated stocks where multiple contraction combined with Quality characteristics set up for buying opportunities.”

The first screen is Buy-rated stocks in the Russell 1000 (IWB) with the following characteristics:

• Top quartile by low cash flow growth standard deviation (10 years, annual)
• Positive 10-year cash flow CAGR
• P/E currently -10% below the 5-year average (plus absolute P/E under 50)

The stocks by sector are:

Communication Services (XLC)

1. DISH Network (DISH), current P/E 6, 5-year P/E average 13.9, 10-year CAGR 20.7%, 10-year standard deviation 2.4%
2. Alphabet (GOOG) (GOOGL), 20.1, 29, 11.5%, 20.2%
3. Omnicom Group (OMC), 11.1, 12.8, 20%, 4%
4. Sirius XM (SIRI), 17.8, 29.4, 18.4%, 14.2%
5. AT&T (T), 7.5, 9.6, 11.2%, 1.9%
6. Warner Bros. Discover (WBD), 7.1, 10.5, 19.7%, 9.6%

Consumer Discretionary (XLY)

1. Advance Auto Parts (AAP), 16.4, 20.2, 21.5%, 3%
2. Domino’s Pizza (DPZ), 25.5, 35.1, 15.1%, 15.6%
3. GM (GM), 5.2, 7.5, 19.5%, 6.4%
4. Home Depot (HD), 18.2, 23, 12.9%, 9.6%
5. Ross Stores (ROST), 19.2, 34.5, 15.8%, 7.8%
6. Estee Lauder (EL), 31.3, 40.2, 22.7%, 13.5%

Financials (XLF)

1. Capital One (COF), 4.4, 13.2, 13.5%, 5.2%
2. Synchrony Financial (SYF), 4.4, 9.7, 13.2%, 2.6%

Healthcare (XLV)

1. Charles River Labs (CRL), 22, 26.7, 14.3%, 13.9%
2. Danaher (DHR), 24.1, 30.1, 20.6%, 12.3%
3. Intuitive Surgical (NASDAQ:ISRG), 44.4, 54.6, 20.6%, 12.3%
4. Medtronic (MDT), 18.2, 21.3, 22.7%, 5.2%
5. Qiagen (QGEN), 16, 25.6, 18.4%, 10.1%

Industrials (XLI)

1. Dover (DOV), 16.7, 18.8, 14.4%, 0.5%
2. IDEX (IDX), 26.5, 31.5, 11.2%, 8.4%
3. J.B. Hunt (NASDAQ:JBHT), 20, 25.4, 14.4%, 0.5%
4. Middleby (MIDD), 16.9, 22.6, 22.1%, 12.5%
5. Rockwell Automation (ROK), 23.6, 26.3, 17.6%, 7%

Info Tech (XLK)

1. Akamai (AKAM), 17, 21.4, 9.1%, 12%
2. Genpact (G), 16.9, 19.1, 15.2%, 10%
3. Mastercard (MA), 35.4, 40.9, 18.6%, 13.2%

Materials (XLB)

1. Berry Global (BERY), 8.7, 13.8, 15.3%, 17.1%
2. WestRock (WRK), 11.1, 14.7, 21.1%, 17.3%

Real Estate (XLRE)

1. American Tower (AMT), 40.5, 57.7, 11.3%, 15.2%
2. Digital Realty (DLR), 26.6, 82.4, 12.5%, 15.4%
3. Sun Communities (SUI), 49.6, 94.7, 15.2%, 28.3%

The second screens for Buy-rated stocks with:

• Top quartile by low debt ratios (average debt-to-equity, -assets, and -capital)
• P/E currently -10% below 5-year average (plus absolute P/E under 50)

The stocks by sector are:

Communication Services (XLC)

1. Activision Blizzard (ATVI), current P/E 22.1, 5-year P/E/ average 25.2, debt ratio to equity 20.2%, debt ratio to total capital 16.8%, debt ratio to assets 14.4%
2. Electronic Arts (EA), 18.3, 23.6, 24.6% 19.8%, 13.6%
3. Meta Platforms (FB), 14.7, 27.8, 11.9%, 10.6%, 8.9%
4. Alphabet (GOOG) (GOOGL), 20.2, 29, 11.3%, 10.1%, 8%

Consumer Discretionary (XLY)

1. Deckers Outdoor (DECK), 14.8, 19..9, 14%, 12.3%, 8.6%
2. D.R. Horton (DHI), 4.8, 11.4, 33.5%, 25.1%, 21%
3. Pulte (PHM), 5.1, 10.1, 33.9%, 25.3%, 21%
4. Yeti (YETI), 18.1, 33.5, 40.5%, 28.8%, 18.6%

Energy (XLE)

1. ConocoPhillips (COP), 12.3, 262, 38.1%, 27.6%, 20.1%
2. Coterra Energy (CTRA), 11.7, 36.6, 29.3%, 22.6%, 16.3%
3. EOG Resources (EOG), 11.2, 39.9, 24.7%, 19.8%, 14%
4. Marathon Oil (MRO), 11.2, 62.7, 36.5%, 26.8%, 23.1%
5. Pioneer Natural (PXD), 13.9, 52.6, 25.5%, 20.3%, 16.3%

Financials (XLF)

1. Comerica (CMA), 10.1, 12.9, 38.1%, 27.6%, 3%
2. Regions Financial (RF), 8.2, 13, 13.8%, 12.1%, 1.4%

Healthcare (XLV)

1. Bio-Rad Labs (BIO), 33.8, 83.8, 13.9%, 12.2%, 1.4%
2. Intuitive Surgical (ISRG), 44.3, 54.6, 0%, 0%, 0%
3. Veeva Systems (VEEV), 43.8, 82, 1.9%, 1.8%, 1.4%

Industrials (XLI)

1. CoStar Group (CSGP), 49.1, 69.3, 19.2%, 16.1%, 15.1%
2. Ingersoll Rand (IR), 20.1, 22.8, 38.4%, 27.7%, 22.8%
3. ITT (ITT), 17.5, 20, 27.6%, 21.7%, 15.5%
4. J.B. Hunt (JBHT), 19.8, 25.4, 39.9%, 28.5%, 18.4%

info Tech (XLK)

1. EPAM Systems (EPAM), 34.6, 45.2, 8.9%, 8.2%, 6.5^
2. IPG Photonics (IPGP), 18.9, 39.8, 1.4%, 1.4%, 1.3%
3. MKS Instruments (MKSI), 10.1, 17.1, 33.9%, 25.3%, 22.1%
4. Micron (MU), 8.2, 12, 16%, 13.8%, 12%
5. Universal Display (OLED), 32.4, 70.5, 2.6%, 2.6%, 2%
6. Teradyne (TER), 17.8, 21, 6.9%, 6.4%, 4.7%

Materials (XLB)

1. Newmont (NEM), 22.7, 27.7, 29%, 22.5%, 15.6%
2. Reliance Steel & Aluminum (RS), 6.8, 12.3, 28.5%, 22.2%, 18.4%

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