In the aftermath of the recent election, the stock market has experienced a surge, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all reaching new highs. However, not all stocks have benefited equally from this rally. According to Jefferies, certain "cheap" names could be poised to jump in the post-election market, offering investors the potential for significant returns.

Uncovering Hidden Gems: Identifying Undervalued Stocks with Upside Potential

Capitalizing on Valuation Discrepancies

Jefferies' analysis suggests that in the aftermath of the 2016 and 2020 elections, stocks with the cheapest valuations eventually performed well, while momentum plays lagged behind. This trend was particularly pronounced for small-cap and mid-cap companies compared to their larger peers. To identify potential winners, Jefferies scoured the market for buy-rated names that fell within the cheapest quintiles based on the firm's valuation model. The focus was on stocks with higher beta, as well as those with recent upward revisions, as these characteristics can offer greater rewards for investors willing to take on the associated risk.

Uncovering Underappreciated Opportunities

The Jefferies team noted that the cheapest names have lagged behind the broader market in recent months, with the "rolling 12-month difference between Q1 and Q5" reaching an extreme level. This suggests that these undervalued stocks may be poised for a rebound, as investors recognize their inherent value. By identifying these overlooked gems, investors can potentially capitalize on the market's tendency to eventually reward stocks with attractive valuations.

Alcoa: Benefiting from Tightening Commodity Markets

One of the stocks highlighted by Jefferies is Alcoa, a company that has recently become cheaper but could outperform in the coming year. The firm's analysts believe Alcoa may benefit from tightening aluminum and alumina markets, as well as the company's ongoing operational improvements under new management. With a price target of $50, Jefferies sees 21% potential upside for Alcoa's stock, which has already gained 21% this year. The company's CEO, William Oplinger, has expressed optimism about the near and long-term demand for aluminum, citing strength in industries such as packaging, automotive, transportation, and the energy transition.

Carnival Cruise Lines: Riding the Wave of Pent-Up Demand

Jefferies also included cruise operator Carnival in its list of potential post-election winners. The firm likes Carnival for several reasons, including the fact that the company's bookings for next year are at an all-time high, indicating strong pent-up demand for travel. Additionally, Carnival's efforts to decrease its financial leverage would accelerate in a lower interest rate environment, further bolstering its prospects. Jefferies' $26 price target on Carnival's stock suggests nearly 7% potential upside from its latest close, and the company's shares have already gained 31% year-to-date, reaching a fresh 52-week high on Thursday.

United Airlines, SoFi, and Boot Barn: Diverse Opportunities

Jefferies' list of potential post-election winners also includes United Airlines, financial technology company SoFi, and retailer Boot Barn. United Airlines, in particular, stands out as one of the strongest names on the list, with its shares more than doubling in 2024. These diverse companies, each with their own unique growth drivers, offer investors a range of opportunities to potentially capitalize on the post-election market dynamics.In conclusion, the Jefferies analysis suggests that investors may be able to uncover hidden gems by focusing on undervalued stocks with higher beta and recent upward revisions. By identifying these overlooked opportunities, investors can position themselves to potentially benefit from the market's tendency to eventually reward stocks with attractive valuations, even in the face of broader market volatility.