Wells Fargo Reveals Its Best Third-quarter Tactical Trades

Wells Fargo’s equity research team has outlined their stock picks for investors as the new quarter begins. Their list for this quarter includes eight stocks with potential near-term catalysts that could drive their prices higher, as well as two stocks that might see a decline.

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Investors are wondering if the impressive gains from the first half of the year will continue into the latter half of 2024. The S&P 500 surged over 14% in the first six months, while the tech-heavy Nasdaq Composite, fueled by the AI boom, rose more than 18%.

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Amid this backdrop, Wells Fargo conducted a screen to identify stocks rated overweight by their analysts and that have positive catalysts in the third quarter. The resulting stock screener report was released on Monday, July 1.

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Here are the stocks that made Wells Fargo’s list:

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Capital One stands out with a potential catalyst if the Discover merger is successful. Additionally, lower-income credit card holders might be more resilient than currently anticipated, according to Wells Fargo. Concerns about its credit card holders have caused Capital One to underperform this year, with its stock rising around 6% compared to the S&P 500’s more than 14% gain. Wells Fargo’s stance is contrary to the broader market, where the average analyst rating is a hold. The average price target suggests more than 10% upside, while Wells Fargo’s target indicates an 18% rally.

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Algonquin Power & Utilities, based in Ontario, could see significant movement in the third quarter as clarity emerges from its strategic review of the $5 billion utility’s non-regulated renewables platform. The current stock price suggests skepticism about the renewable business’s value, but Wells Fargo believes it could be worth $2.4 billion. The proceeds from this valuation could be used to recapitalize Algonquin and authorize a substantial share buyback. Algonquin’s shares, which yield over 7%, have fallen more than 13% this year. Analysts surveyed by LSEG expect a rebound of more than 15%, while Wells Fargo forecasts a 44% increase excluding the dividend. Despite this, the average analyst rating is a hold.

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On Semiconductor is another notable pick. Like other analog/mixed-signal chip companies, it is beginning to show signs of a cyclical upturn that could improve gross margins, Wells Fargo noted. On Semiconductor has struggled this year as investors have shunned automotive chipmakers, with its shares down over 14% in 2024, while the iShares Semiconductor ETF (SOXX) has surged more than 28%. Wells Fargo suggests that On Semiconductor might benefit from announcements of significant wins from original equipment manufacturers in China, including BYD, for its silicon carbide chip business. The average analyst surveyed by LSEG is also bullish, with a typical price target implying nearly 16% upside, while Wells Fargo sees the stock soaring more than 37% from Monday’s close.

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Conversely, Wells Fargo identified Tesla and Old Dominion Freight Line as stocks that might face negative catalysts in the third quarter. However, this prediction hasn’t materialized for Tesla so far, as the stock soared 25% this week following better-than-expected second-quarter vehicle deliveries.

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In summary, Wells Fargo’s stock picks reflect a strategic approach to capitalize on specific near-term catalysts while remaining cautious about certain stocks that might face headwinds. Capital One, Algonquin Power & Utilities, and On Semiconductor have been highlighted for their potential upside, supported by specific market conditions and strategic developments. At the same time, Tesla and Old Dominion Freight Line are viewed with caution due to potential negative catalysts. This balanced perspective aims to guide investors through the uncertainties of the second half of 2024, leveraging detailed analysis and market insights to identify both opportunities and risks.

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