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Stocks of the Week: Banks, Alcoa, General Dynamics

A look at some of the stocks receiving attention in the challenging start of 2022.

The stock market got off on the wrong foot for the first trading week of 2022, with the Dow Jones Industrial index falling -2.07%.

While that scenario tripped up investors, all is not lost.

“The first week of 2022 was miserable for most of the stock market,” said Real Money's James “Rev Shark” Deporre. “There have been concerns for a while that inflation was building and bonds were faltering, but the market has been trying to ignore the issue for a while.”

He added that “Worries about a more hawkish Federal Reserve have been pressuring some growth stocks and small caps, and when the minutes of the last Fed meeting were released on January 5th, the market was surprised by the level of hawkishness.”

As a result, “Expectations for rate hikes jumped sharply following the release of the minutes,” Deporre said. “There’s now a 90% chance of a quarter-point hike in March and then a series of monthly hikes after that.”

The jobs numbers released on January 7th didn't help as the unemployment rate dropped more than expected, and wages were stronger than anticipated. The jobs market largely remains strong, and that is adding to inflationary pressures.

“The basic problem is that the market has not fully priced in higher inflation and interest rates, and much of the discounting has occurred on a very uneven basis, with small stocks and growth names bearing much of the selling pressure while big-cap names and indices held up,” Deporre said.

The fact is, the stock market needs some time to deal with this inconsistency, with no clear resolution in sight.

“The good news is that there are some tremendous opportunities developing, but the market just doesn't care right now,” Deporre said. “Action like this always leads to great stock picking, but we have to wait for the price action to improve.”

Still, not all corners of the market are limited. Investors may want to focus on the latest “stocks of the week” batch, selected by experts.

Bank of America  (BAC) - Get Bank of America Corp Report $48.97 – 5-Day Performance: 6.03%

PNC Financial Services  (PNC) - Get PNC Financial Services Group, Inc. Report $22.85 – 5-Day Performance 7.03%

U.S. bank stocks are up, as many economists and investors expect the Federal Reserve to begin raising interest rates in March.

“Bank stocks are starting off the year with a bang in reaction to the Federal Reserve’s adoption of a more hawkish stance on monetary policy,” reported TheStreet’s Dan Weil. “The KBW Nasdaq Bank Index, which covers 24 of the biggest U.S. banks, has soared 10% so far in 2022, matching its 2010 record for the first five days of a year, according to Bloomberg.”

Additionally, ascending rates and faster loan growth represent “the two biggest catalysts for investors to become more bullish on bank stocks,” Raymond James analysts wrote in a note.

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JPMorgan analysts favor two bank stocks right now – Bank of America and PNC.

“Bank of America, should particularly benefit from higher interest rates,” JPMorgan analysts said.

“PNC Financial Services should enjoy merger cost savings while it invests in "large excess liquidity," analysts added.

Alcoa (AA) $62.30 – 5-Day Performance 2.99%. Alcoa has been running hot over the past three months, gaining 30.11% in an otherwise tepid U.S. stock market.

“AA still has a strong look to it,” said Real Money’s Timothy Collins. “It's worth noting the stock has closed up five straight weeks, moving from $45 to $62. That's a huge move for a name like this.”

Collins advises investors to be cautious moving forward with AA, even though he likes the stock.

“The StochRSI is overbought, shares are pushing the resistance line dating back to the start of summer, and we're pretty extended from those moving averages,” he said. “If growth rebounds, my bet is AA sets up as a put or short candidate. However, looking at this chart, we may be two to four weeks away from that happening.”

General Dynamics (GD) $211.73 – 5-Day Performance 2.06%. The defense contract giant is up 34.5% over the past year, but growth has been running slower of late – the stock has only gained about 4% over the past 90 days.

Still, Real Money’s Bruce Kamich took a sharp look at GD last week after it broke out to a new high.

An updated daily bar chart of GD, taken in early January, showed that prices are still strong. “Prices tested and rebounded off the rising 200-day moving average line in late November/early December,” ,Kamich wrote. “The On-Balance-Volume (OBV) line has remained firm and is close to making a new high to confirm and support the price advance. The Moving Average Convergence Divergence (MACD) oscillator is bullish.”

Kamich said that GD is “close” to a new buy signal adding that share prices are trading above the rising 40-week moving average line. He sees a new upside price target in the $248-$250 area.

“That’s our new price objective for General Dynamics,” Kamich noted.

Discovery  (DSCA)  $28.81 – 5-Day Performance 13.76%. Discovery is up 26.66% over the past month, and should draw more attention after a “buy” upgrade from Bank of America based on its deal to acquire WarnerMedia Deal, (now owned by AT&T  (T) - Get AT&T Inc. Report.)

“With the combination of highly complementary assets, Warner Bros. Discovery will have the potential to “create a global media powerhouse driven by creative and content leadership,” analyst Jessica Reif Ehrlich wrote in a research note.“WarnerMedia is comprised of best-in-class film and TV studios, … other entertainment assets and a deep library, while DISCA’s portfolio of proven lifestyle, reality-TV and unscripted brands have notable strength.”

Erich sees several areas for possible revenue and cost synergies and is enthusiastic about opportunities for a combined HBO Max/Discovery+ direct-to-consumer video service. She recently raised her price target for Discovery to $45 from $34.

“We view DISCA’s initial cost synergy target of $3 billion as highly achievable, if not conservative, given the several areas of duplicative expenses (e.g. technology, ad/distribution sales force, etc.),” Ehrlich said. “Moreover, we see several areas for incremental revenue opportunities (e.g. scale in advertising/distribution, pricing, advertising-based video on demand), which have not been addressed within management.”

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