The economic recovery will make these stocks winners in 2021, DA Davidson says

Published Thu, Dec 24 20208:30 AM ESTUpdated Thu, Dec 24 202010:03 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). Investors should focus on "recovery exposed" stocks in 2021 to take advantage of the economic rebound and market rotation, according to D.A. Davidson. The investment firm sent a note to clients this week identifying companies that have strong operating leverage and the potential for big improvements in revenue and expenses. "We believe that at the intersection of these trends we have found the companies with the greatest leverage to the recovery," the analysts said. Some of the selections with the highest upside to analyst price targets are in industries where the economic reopening will have obvious benefits. One of these is Ulta Beauty , and D.A. Davidson's $310 per share 12-month price target for the stock represents about 15% upside from Wednesday's closing price. "As the economy reopens, we expect to see more consumers venturing out of their homes and into the public, that almost by definition means more makeup wearing occasions, which of course means a sales recovery for ULTA," the note said. The struggles for the retail and beauty industries during Covid could lead to an even stronger rebound for Ulta. D.A. Davidson estimated that $1.8 billion of the beauty market is up for grabs due to bankruptcies and store closures during the pandemic. "As an industry leader, if ULTA picks up 20% of that, which seems like a good rule of thumb for competitor sales gains as stores go dark, that would equate to $360M," the note said. Another sector that many analysts expect to rebound in 2021 is banks. The KBW Bank Index has outperformed the broader market during the fourth quarter as progress on vaccines improved the economic outlook for 2021 and the Federal Reserve eased its restrictions on stock buybacks. Among major banks, D.A. Davidson selected Citigroup . The firm's $73 per share price target for Citi for 2021 is nearly 20% above where shares closed on Wednesday. "We believe the key to outperformance in 2021 will be its credit card business, as lower unemployment trends, vaccines and potential further stimulus will drive lower than expected loss rates ... and an increase in consensus earnings estimates," the note said. The investment firm also listed some tech stocks that are well positioned for economic recovery, even though the sector has seen such large gains in 2020. One of them is semiconductor company Kulicke and Soffa Industries , which has a $40 per share price target from D.A. Davidson, implying nearly 22% upside. D.A. Davidson said that the company is at the start of a multiyear recovery. Another tech name is Guidewire Software , whose $144 per share price target is 12% above where shares closed on Wednesday. The investment firm said enterprise software should see a recovery as businesses restart projects and increase spending on cloud infrastructure during the economic recovery.

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(This story is for CNBC Pro subscribers only).

Investors should focus on "recovery exposed" stocks in 2021 to take advantage of the economic rebound and market rotation, according to D.A. Davidson.

The investment firm sent a note to clients this week identifying companies that have strong operating leverage and the potential for big improvements in revenue and expenses.