These cheap stocks will outperform in a pullback or a continued rally, says Evercore ISI

Published Tue, Mar 12 20249:35 AM EDT

Laggard stocks that have underperformed the broader market could offer investors a good portfolio hedge, according to Evercore ISI. In a recent note, the investment firm broke down the dichotomy of choices facing traders this year — to embrace greed by chasing market leaders, or confront fear by buying laggards. The fact that stocks are historically uncorrelated — with a small number of names driving most of the market's gains — makes the latter strategy even more compelling for investors, strategist Julian Emanuel wrote in a research note. "Optimizing longs — playing defense with offense — rotating to stocks which have underperformed SPX since the pivotal 10/27/23 low … allows participation in upside yet to be realized by the market and affords a 'margin of safety' to the downside given these names lag the momentum driven tape," he said. "As last Friday's price action illustrated, downside is likely to be led by the same momentum names which have led to the upside." In the same note, the investment firm released its list of "Emotional Rescue" stocks, or names that have underperformed the S & P 500 since Oct. 27, 2023, and could outperform in the near future. Additionally, the names also had to meet the following criteria: Estimated 2024 price-to-earnings ratio is trading at a discount relative to 5-year average forward price-to-earnings ratio Have experienced positive estimated 2024 earnings revisions since Oct. 27 Individual estimated 2024 earnings growth exceeds sector's estimated 2024 earnings growth The beauty in this basket of stocks is that it is likely to rise in both a sustained rally or pullback, Emanuel added, giving investors a nice hedge to their portfolios no matter the near-term market backdrop. "We believe these stocks will outperform should the market continue higher as investors realize their unique earnings trajectory and valuation appeal," he said. "We also believe that these names will outperform in a correction given they have not participated fully in 2024's momentum." Here are a few of the names included on Evercore ISI's list: Shares of coffee chain Starbucks have remained virtually unchanged since Oct. 27, lagging the S & P 500's 24% rally in that same time. Evercore ISI has assigned the stock an outperform rating, although most analysts covering the stocks rate it as a hold. The average analyst upside sees the stock rallying 16%. Earlier this month, Wells Fargo reiterated Starbucks as one of its top picks , calling sentiment "mixed at best." Consumer goods manufacturer Procter & Gamble also found itself on the list. The company's stock has risen 10% since Oct. 27. Most analysts covering the name have assigned it a buy rating — in line with Evercore ISI's outperform rating — with analyst consensus seeing a 5% rally ahead. On Monday Truist upgraded the name to a buy rating from hold, saying the stock was nearing an "inflection point" and citing signs of improvement in Procter & Gamble's China business . "In our opinion, if PG can post volume growth in the coming quarters, it will break from the CPG pack (especially its food peers, for whom we expect volume declines to continue) which should result in improved valuation for PG shares," the bank wrote. Outperform-rated Mondelez International stock has risen 11% since Oct. 27. The multinational food company is overwhelmingly buy-rated, with analysts estimating a potential 16% upside on average. Cocoa prices have spiked to record highs in recent months, boosted by adverse weather conditions and an onslaught of the cacao swollen shoot virus. While Mondelez has diversified its portfolio outside of chocolate products, the company has certainly felt some pain from the commodity's rising prices, similar to its peer Hershey . — CNBC's Michael Bloom contributed to this report.