Reopening stocks are set for a ‘monstrous rally’ next week, and these are the 6 stocks that could benefit, Fundstrat’s Tom Lee says

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  • Stocks that are poised to benefit from the reopening of the US economy are set to experience a “monstrous rally” next week, according to Fundstrat’s Tom Lee.
  • In a CNBC interview with Scott Wapner on Friday, Lee said that when COVID-19 cases peaked in April, it took 20 days for value stocks to stage a sharp rally.
  • With COVID-19 cases having peaked on July 27, according to Lee, these same stocks are setting up for another major move higher that should occur late next week.
  • Lee also noted that there is “so much cash on the sidelines still,” which represents a “monster amount of buying power” that can lead to higher stock prices once investors feel confident putting that cash to work.
  • Lee listed six stocks that “could make a big bounce” if his prediction plays out.
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Reopening stocks are set to stage a “monstrous rally” next week as cash on the sidelines continues to represent a “monster amount of buying power,” Tom Lee said in an interview with CNBC’s Scott Wapner on Friday.

The reopening stocks, also called “epicenter stocks” by Lee, are stocks that should benefit from a steady reopening of the US economy, and include the travel, leisure, and hospitality sectors.

Part of Lee’s conclusion that reopening stocks are set for a big move in outperformance sometime next week stems from an analysis his team at Fundstrat conducted.

According to the research firm, it took 20 days between a peak in COVID-19 cases in late April and a rally in value stocks to occur, as investors needed time to digest the news and see if the worst was really over before they committed their money to beaten-down stocks that rely on an opened-up economy.

Read more: JPMorgan says buy these 19 ‘diamond in the rough’ stocks that have plunged from yearly highs, but are spring-loaded for huge gains ahead

“If we look at the current context, daily cases peaked July 27. The 20th day would be August 14 … so I think it will happen next week and we will see a violent rotation,” Lee argued.

Lee also pointed to Friday’s jobs report, which showed a 50% retracement of jobs lost since the pandemic began. That to him signaled that the economy is healthy and recovering.

“I think the economy’s healthy, [so] these cyclical stocks could rally big,” Lee said, adding that the last rotation into cyclical stocks sparked a 30% rally in the downtrodden sectors.

Lee said investors need to realize that a successful COVID-19 vaccine or cure would mitigate a lot of permanent changes and risks to the economy that many have accepted as the new normal over the past few months.

“That makes these stocks vulnerable to a massive, massive upside re-rate,” Lee said.

So, what companies should investors look at if reopening stocks are poised for a massive rally next week?

Read more: A Wall Street investment chief warns new stock-market highs could be setting up a ‘historic trap’ for investors — one that also appeared just before the dot-com crash

According to Lee, they’re Target, Best Buy, Pulte, Borg Warner, AutoNation, and Mosaic.

“It’s going to be what people probably perceive as high-quality companies that just got absolutely obliterated that could make a big bounce,” Lee explained.

Finally, Lee said that cash on the sidelines is something investors need to keep an eye on when considering the upside potential left in the stock market.

“I think there’s so much cash on the sidelines still,” according to Lee, who pointed to sentiment readings and conversations with some of Fundstrat’s clients who are still cautiously positioned as evidence. 

Lee added that there’s still as much as $5 trillion in money market funds, which represents a “monster amount of buying power” for stocks. 

Read more: ‘The most extreme valuations in history’: A notorious market bear says investors should brace for record-low negative returns over the next 12 years — and warns that today’s exuberance implies a 66% plunge

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