Investors seeking stocks that can outperform amid the market’s turmoil should consider so-called “idiosyncratic” growth stocks, which tend to be fueled more by the fundamentals of the individual company rather than macroeconomic shocks. Thus, these stocks’ idiosyncratic risk often protects them from getting dragged down with the rest of the broader market. “With US–China trade war intensifying, investors may want to seek shelter in less macro, more idiosyncratic growth stocks,” says Bank of America in a report, adding that these equities offer strong growth and are “relatively untethered to the macro environment.” Bank of America has identified a list of 17 idiosyncratic stocks that can lead in this environment.
What it Means for Investors
We focus on ten of those stocks, which have implied upside ranging from 15% to 75% and include: Hilton Worldwide Holdings Inc. (HLT), 18.8%; CarMax Inc. (KMX), 74.6%; Exact Sciences Corp. (EXAS), 15.1%; Ferrari NV (RACE), 43.7%; Advanced Micro Devices Inc. (AMD), 38.6%; Arista Networks Inc. (ANET), 52.7%; Domino’s Pizza Inc. (DPZ), 23.7%; Tempur Sealy International Inc. (TPX), 31.7%; Salesforce.com Inc. (CRM), 40.1%; and Amazon.com Inc. (AMZN), 31.4%.
Four key characteristics set these stocks apart. They are less exposed to the effects of the U.S.–China trade war, including potential currency fluctuations; they are either uncorrelated with interest rates or perform better in a “lower for longer” interest rate environment; they have dominant market shares; and they have individual catalysts on the horizon that promise to boost their shares.
One stock is CarMax, America’s largest used car retailer, which just recorded record net income and earnings per share in the first quarter, according to Barron’s. CarMax’s sale of used cars domestically means the retailer is not exposed to tariffs or currency fluctuations, and lower interest rates will make it easier for consumers to obtain auto loans. As for upcoming catalysts, CarMax recently introduced its “omni-channel” sales model enabling consumers to buy their car from home, in the store, online or a combination of all three. The service is expected to be rolled out to the majority of customers early next year. “This, combined with continued focus on new store openings and elevated levels of off-lease and trade-in units returning to the used car market in 2019+ will likely drive KMX earnings higher through our forecast period and beyond,” say Bank of America.
To be sure, even these idiosyncratic stocks are likely to be affected by severe or long-lasting macro events. But their outlook is bright nonetheless. The average stock on the bank’s list has a long-term growth rate of 22%, well above the S&P 500’s of 13%.