Buy cheap quality stocks for the third quarter, says Piper Sandler

Investors should look for companies in the third quarter that are on solid ground, both in their fundamental business and their stock price, according to Piper Sandler. Michael Kantrowitz, chief investment strategist and head of portfolio strategy, said in a note to clients that the next steps for the market and economy are unclear but that a subgroup of stocks should be able to power through. “We believe general uncertainty and lack of a clear economic trajectory will persist into the foreseeable future. Thus, we continue to recommend overweighting quality fundamentals at a reasonable price,” the note said. The firm’s yardsticks for quality fundamentals include free cash flow yield and positive earnings revisions. Piper Sandler’s macro select model includes some of the big tech companies that have outperformed in recent years, in part due to their combination of solid balance sheets and strong growth. But it also includes some consumer-focused companies that the investment bank says are on solid footing. Alphabet has fallen behind some of its peers in the race to become the biggest stock in the world, but that may mean it is less overbought than other tech giants such as Nvidia or Microsoft. Shares are up 32% this year, pushing the Google parent’s market cap above $2 trillion. Two other stocks on the list with momentum are Chipotle Mexican Grill and Wingstop , up roughly 37% and 66%, respectively, in 2024. Both restaurant chains are succeeding despite signs that more consumers questioning their discretionary spending. Chipotle reported growing earnings and traffic in its first-quarter report. Netflix is also one of the top performers on the list, up more than 40% so far in 2024 as its advertising tier hit 40 million monthly users in May. The advertising tier is seen as a way for Netflix to grow both its total user base and, potentially, its average revenue per user. But another entertainment stock on the list is more of a turnaround. Shares of AMC Networks are down about 51% year to date, as companies that are reliant on the cable bundle are under pressure. Still, the company did report positive free cash flow in its first quarter — a reversal from last year — and unveiled a deal to raise another $125 million this month. A second rebound candidate is Academy Sports and Outdoors , whose shares are down 19% year to date. The company said in its first-quarter report that cash was up and debt was down compared with the same period a year ago.