Just last week, I wrote a piece on why the S&P 500 could rally big this summer, and which summer stocks to buy to maximize return in that rally.
The logic behind that article was pretty straight-forward. Stocks are trading at historically normal valuation levels (16-times forward earnings). But earnings growth is supercharged thanks to both tax cuts and broad economic strength and consumer confidence (both short- and long-term earnings growth projections for the market are at multi-year highs).
This combination of historically normal valuation and historically above-normal earnings growth has the S&P 500 trading at a PEG (price-to-earnings/growth) ratio of just 1.
The market has traded at a PEG ratio of 1 or lower only twice over the past two decades. Once was in 2008. The other was in 2011. Both times, the market had formed a sustainable long-term bottom, and stocks staged a big rally off that low.
In other words, it feels like the choppy trade in the stock market year-to-date has just been a normalization period from what was pure euphoria in January. Now, valuations have normalized to a historically stable point. But the economic growth backdrop remains robust. As such, stocks could bounce back in a big way this summer.
As for all those summer stocks to buy? Let’s take a deeper look at which sectors could roar higher:
Why Hollywood Will Win Big This Summer
Hollywood stocks could be big winners this summer for multiple reasons.
First, the present economic backdrop lends itself to strong box office spend this summer. Consumer confidence continues to roar higher. Income expectations are on the rise, and indeed, wages are finally picking up. Geopolitical tensions seem to be easing. All in all, the economic backdrop in the U.S. is very, very strong for the consumer.
Second, the content line-up thus far in 2018 has been about as good as ever, creating high expectations for the summer line-up. Year-to-date, 2018 box office revenues are up nearly 7% year-over-year. That is a pretty big number. At this point last year, box office revenues were up just 3% year-over-year. The two years before that, they were up less than 5% year-over-year.
Third, the content line-up in summer 2018 should be even better than what has happened thus far in 2018. Walt Disney Co (NYSE:DIS) will launch a new Star Wars movie. Netflix, Inc. (NASDAQ:NFLX) is debuting a bunch of highly-anticipated second season installments to their original hits. Time Warner Inc (NYSE:TWX) is releasing Ocean’s 8, a highly anticipated follow-up to the widely loved Ocean’s series.
Across the board, there are multiple reasons why Hollywood stocks will morph into this summer’s biggest winners.
But this summer, you want to buy the Hollywood stocks that don’t have significant cord-cutting exposure, or at least have mitigated exposure to cord-cutting. At the top of that list is Netflix. But after Netflix, Disney looks like a good buy, too, because gambling and streaming tailwinds should off-set core cord-cutting pain. The theater stocks, like AMC Entertainment Holdings Inc (NYSE:AMC), should do well. The pure-play streaming stocks, like Roku Inc (NASDAQ:ROKU), should also do well.
Oil, Technology & Retail Could Have Big Rallies
Outside of Hollywood, the other three places I’m expecting big rallies this summer are in oil, technology, and retail.
On the oil side of things, the supply-demand dynamics are starting to shape up to be the most price-favorable they have been in a long time. Supply is being threatened by rising tensions in the Middle East. Demand is strengthening thanks to a pick-up in the global economy. All in all, oil prices are rising, bulls are in control, and $100 a barrel is being thrown around as a real possibility by the end of the year.
If oil prices keep rising from the dead, oil stocks will keep bouncing. In this space, I mostly like Exxon Mobil Corporation (NYSE:XOM) owing to its oil price exposure that also comes with mitigated volatility due to the company’s size and dividend.
Another sector that should keep rising from the dead this summer is retail. For most of 2016 and into 2017, investors were pricing retail stocks as if they were headed for the graveyard. But that was just a wrong thesis. Brick-and-mortar wasn’t entirely dying at the hands of Amazon.com, Inc. (NASDAQ:AMZN). It was simply right-sizing to live side-by-side with Amazon.
Now, that right-sizing appears to be largely over, and retailers are reporting better-than-expected numbers. That is causing retail stocks to pop. This rally should only strengthen this summer with consumer confidence at all time highs. The names I like in this space include Macy’s Inc (NYSE:M), Target Corporation (NYSE:TGT), and Abercrombie & Fitch Co. (NYSE:ANF).
Technology stocks, which have been weak year-to-date, should also morph into big winners this summer. Nothing is wrong with Facebook Inc (NASDAQ:FB), Amazon, Netflix, or Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) outside of headline regulatory risk. The underlying growth narrative remain positive. Thus, once these headline risks pass, the stocks should resume their long-term upward trajectories.
Bottom Line on Summer Stocks
This summer could be big for stocks. Across the board, cheap valuations are converging on big earnings, a combination which normally leads to out-sized gains.
My favorite summer stocks to buy? All of FANG. Oil stocks, like XOM. Retail stocks, like M and TGT. And Hollywood stocks, like DIS.
As of this writing, Luke Lango was long DIS, AMC, XOM, AMZN, M, TGT, FB, and GOOG.