Stocks are slouching into September as investors weigh the likelihood of a recession ahead. Still, UBS believes some high quality, high conviction names can outperform regardless of a slowdown. “We currently see Quality as having the best risk/reward across factors,” UBS strategist Keith Parker said in a Tuesday note. “When equity market implied recession probabilities go above the 80th percentile (i.e. in June), high quality has historically outperformed low by 10-15% in the following 12 months, regardless of whether a recession actually materializes – presenting an attractive opportunity,” he added. All the major averages are set to post declines in August as traders deliberate the duration of the current rate hiking cycle. Both the Dow Jones Industrial Average and S & P 500 are down more than 3% this month, and the Nasdaq Composite is on pace to record a loss of about 4%. Still, higher quality stocks “still have room to rise toward cycle highs, particularly given heightened recession risk,” according to UBS. The investment firm said high quality, composite momentum and fundamental growth stocks are the most attractive opportunities in a downturn. UBS drew up a selection of stock names in its coverage that are high quality and within the top 20% of improving quality, with better than average free cash flow yield and robust forward sales growth, according to the note. Moreover, these picks are rated buys with greater than 20% upside. Here are seven names: UBS says TE Connectivity , a manufacturer of connectors and sensors for several industries, is a high conviction pick. According to the note, the company will be a beneficiary of the electric vehicle transition, which “doubles the revenue opportunity.” UBS believes the stock will surge 30% from Friday’s closing price. “We expect TE Auto outgrowth will widen above historical levels as EV market share compounds and EV unit production inflects,” the note read. Meanwhile, Ulta is another high conviction pick. UBS analysts expect that demand for beauty products, particularly skin and hair care, will remain strong next year and in 2023. In the short term, the beauty retailer will continue to benefit from the reopening trend. The strategist also approved of the company’s ad-targeting capabilities. Ulta is forecast to have upside of 29%. SBA Communications is the tower operator “best positioned for the upcoming 5G investment cycle,” according to the note. The company, which has the highest exposure to the U.S. among its peer group, should get an outsized boost from record-high capital expenditures in U.S. wireless in the coming years, according to UBS. The real estate stock could jump 24%. Other stocks included in this list include NextEra Energy , Knight-Swift Transportation Holdings , Microsoft and Alphabet . —CNBC’s Michael Bloom contributed to this report.
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