Fundstrat's Tom Lee told clients to buy underperforming stocks disliked by Wall Street analysts. The strategist reiterated his call for a market pullback.
"In 2017 so far, equities have been very strong … performing considerably better than we expected. However, in coming weeks, equities may be facing some headwinds," Lee wrote in a note to clients Friday.
"Our base case remains that the flattening long-term yield curve points to a drawdown of equities in 1H17 (along with post-Prez election year dynamics). ... We continue to favor CRAP (acronym for computers/old tech, resources, American-based banks and telecoms) … and laggards."
The strategist's price target for the S&P 500 is 2,275, representing 4 percent downside to Thursday's close. The benchmark is up 6 percent this year through Thursday.
Lee said Wall Street expects the Federal Reserve to raise interest rates for the third time in this cycle next week. He cited how the market has declined 2.2 percent on average in the three months after a third rate hike since 1971.
In addition, the strategist noted the performance spread between high-yield bonds and the S&P 500 widened by 30 basis points in the past week. High yield underperformed stocks by a "sizable margin. … We continue to view HY as leading the equities market," he said.
Even if the market does pull back, Lee recommends buying contrarian stock ideas not appreciated by Wall Street. He said the bottom 20 percent "least liked" stocks covered by sell-side firms outperformed the "most liked" 20 percent by 7.4 percentage points last year.
Here are five hated stocks Lee highlighted, which made the recommended list.