UBS says high quality outperforms in recessions — 10 such stocks on sale

Published Thu, Dec 8 20223:26 PM ESTUpdated Thu, Dec 8 20223:35 PM EST

Look to cheap high-quality stocks to manage recession risk in the new year, according to UBS. In 2023, resilience should be a key theme for investors as the Federal Reserve's tightening leads to falling inflation and an oncoming economic downturn, the bank said. "Our analysis of styles around recession since '65 shows notable upside for quality, momentum and large over small, with value dependent on financial conditions," UBS strategist Keith Parker said in the note. "Our macro baseline and [machine learning] model points to smaller factor returns in H1 amid high rates and slowing growth," he said. "A deeper recession and falling rates should drive larger factor swings in H2 leading to quality and growth factors outperforming value, with momentum eventually rolling over." UBS highlighted several stocks in the S & P 1500 with market caps of more than $6 billion. From there, it screened for the most undervalued stocks based on its machine-learning model. Here are 10 of the stocks: One of the highest-quality stocks on the list is cosmetics retailer Ulta Beauty , in the 99.1 percentile. Last week, the company's quarterly results surpassed Wall Street's expectations , and Ulta boosted its earnings and revenue outlook. It's up 15% this year. Tied with Ulta is the software company Cadence Design Systems , also in the 99th percentile for quality. The company beat on top and bottom lines when it posted its latest quarterly results in October, according to FactSet. Cadence also raised its guidance for per-share earnings and revenue for the full year. Alphabet and Walmart are among the biggest names on the list. They're in the 93rd and 76th percentiles, respectively. Like Ulta, Walmart also raised its guidance when it reported earnings last month . The retail giant's shares are currently sitting at a 2% gain for the year. Alphabet is down 35% in 2022. Construction supplier Fastenal is another high ranker for quality, in the 95th percentile. It's currently 20% lower for the year. Huntington Bancshares , Deckers Outdoor , Booking Holdings and Devon Energy are also quality picks.