Citi gives its top picks for clients heading into the fourth quarter

As the fourth quarter gets underway, there are some stocks that may be poised to outperform over the next several months, according to Citi. September marked another positive month for stocks, with all three major averages finishing in the green, despite some tumultuous periods. The S & P 500 and the Nasdaq Composite are up more than 19% this year, and the Dow Jones Industrial Average is up more than 11%. “Now, broadening is apparent, with Value leading while Growth has not yet achieved July levels,” Scott Chronert said in a Friday note to clients. The investment bank’s head of U.S. equity strategy said expectations for a soft landing sentiment, tailwinds from AI investment and the upcoming presidential election could all serve as catalysts to move stocks higher. “Importantly, an early theme related to ’25 is earnings growth rate convergence,” he said. “In turn, while index level valuations appear full, we advocate shifting the focus to ongoing stock specific opportunities as we head into Q4.” With this in mind, Citi updated its focus list for North America – a basket of bottom-up stock ideas with the highest conviction for the next 12 months. The firm added names such as Ally Financial , and removed others like Ideaya Biosciences and Alnylam Pharmaceuticals . Below are some names that made the list. Citi views newly added Ally Financial as “one of the best-positioned liability sensitive names,” seeing the potential for total book value growth of 25% by the fourth quarter of next year. “While mistakes were clearly made with the ’22 auto vintage, the short duration of this asset class implies ALLY will not be stuck with the problem beyond 2025,” analyst Keith Horowitz wrote. “[A]s that vintage continues to burn down, the improved ’23 and ’24 vintages will improve overall performance of the book.” Horowitz expects Ally will update its outlook for credit losses when it reports its third-quarter results. If the outlook improves, he expects investors will reward the company with a higher valuation. As it stands, Wall Street is pretty split on the name, with 10 of the 21 analysts covering Ally having a strong buy or buy rating. Eight analysts have a neutral rating, while three rated Ally as underperform. Meanwhile, Citi has a buy rating on the stock, and its price target of $50 implies nearly 45% upside from Wednesday’s close. This year, shares of Ally are marginally lower, down around 2%. Citi also named United Airlines as one of its top picks, saying any details about lower capital expenditures, a potential share repurchase or an uptick in card revenue could drive shares higher. The firm expects the domestic airline industry to see an uptick in unit revenue growth in the third quarter, with United benefiting from increased wallet share compared with pre-pandemic levels. Its target of $90 implies more than 61% upside, as of Wednesday’s close, and shares are already up around 35% in 2024. “Moreover, reduced capacity growth from competing discount airlines, along with consolidation among other carriers, helps create a more rational environment on which United and others can grow earnings,” analyst Stephen Trent wrote. UAL YTD mountain UAL, year to date Citi’s top pick in beverages, Coca-Cola , made the list. Analyst Filippo Falorni said the company has a “stronger” organic sales growth profile and he anticipates both third- and fourth-quarter earnings this year to come in higher than its peers. The bank’s target of $85 implies more than 19% upside from Wednesday’s close. The stock is up more than 20% year to date.