An ‘above-average growth story’ is about to unfold. 3 stocks to play it from a top-performing fund manager.

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It’s like Monday’s wipeout never happened. U.S. stock market indexes are now positive for the week, led by technology stocks as investors, at least for now, choose to park worries over the highly contagious delta coronavirus strain and buy whatever dip remains.

Our call of the day from Josh Wein, portfolio manager for the Hennessy Cornerstone Mid Cap 30 Fund says investors weren’t wrong to put money to work in stocks this week after that big tumble. He believes the asset class remains the best choice for investors right now.

“With both the S&P 500 and Russell 2000 exhibiting a roughly 5% forward earnings yield and the 10-year bond trading at 1.25%, the spread between the two is quite compelling,” Wein told MarketWatch, in follow-up comments to a Monday interview.

“Investors should remain engaged as we see an emerging profit margin expansion and above-average growth story unfolding in coming quarters,” said the manager, whose fund has returned 85% over the trailing one-year period, putting it in the top 2% of its midcap blend peer group on Morningstar.  

Wein said markets seem to sell off every six to eight weeks, followed by an orderly march higher, driven in part by the idea that central banks will always serve as a backstop. Yet he doesn’t see the market as frothy or that pullbacks reflect an expensive one.

“I think right now it is about the variant and the idea that growth expectations need to be ratcheted down a little bit more in this country and maybe the same overseas,” Wein said. He’s not too worried about inflation either, which he thinks may be due to a hard economic restart and driven more by the supply chain than demand.

As for hunting down new stock ideas, Wein focuses on three big things: valuations, earnings growth and stock price momentum. “We’ve clearly seen stock price momentum in many sectors and in many stocks, and so it comes down to valuations,” he said. Price to sales ratio — how much markets value every dollar of a company’s sales — is also an important indicator for him.

He’s finding bargains in the value names, such as consumer discretionary, consumer staples, and lots of retail and consumer stocks.

As for stock picks that fit the bill, Wein owns toy maker Mattel which is seeing strong sales growth in its important Barbie, American Girl and Hot Wheels units. The company trades on about 17 times forward earnings, whereas the S&P 500 is trading at about 20 times.

Home builders are another spot primed for growth, he said. “Certainly the home building and home buying story has been so incredible.” In that sector Meritage Homes is a name he likes for its exposure to “growth geographies,” such as Arizona, Colorado, Texas, Georgia and the Carolinas. The company has a strong balance sheet, liquidity and trades on six times forward earnings, he said.

His final pick is a discount retailer Big Lots which is trading at about nine times forward earnings, “growing quite nicely and doing quite well.” The company has a “strong” free cash flow generator, he added.

“What is expensive is size and liquidity. So if you want to be in a large liquid name with growth, like a Microsoft Google or Facebook you’re going to have to pay up for that like never before,” said Wein.

Read: Why the S&P 500 could be poised for a 5% drop — or even more this summer

Jobless claims, ECB meets and Twitter reports

Biotech Biogen telecoms group AT&T and white-goods maker Whirlpool will report ahead of the market open. Chemical group Dow swung to a profit, followed by tech giant Intel and social-media messaging service Twitter after the close.

A lawsuit filed by California authorities has accused videogame giant Activision Blizzard of fostering a “frat boy” workplace culture, including “constant sexual harassment” and paying female workers less than their male counterparts. In a statement to Bloomberg, the company said it takes all such accusations seriously, but said the suit does not paint an accurate picture of “the Blizzard workplace of today.”

Three Southeast Asian nations are right now dealing with soaring COVID-19 death rates and hospitalizations. Yet another study shows two doses of the Pfizer and AstraZeneca shots are almost as effective against the delta variant, than the alpha one before that.

The markets

Stock futures are higher with weekly jobless claims ahead, with European stocks rising ahead of a European Central Bank meeting, where focus is expected to fall on its inflation outlook and how to tackle rising prices. Bitcoin continues to rise, following Tesla Chief Executive Elon Musk’s assurances over his cryptocurrency holdings.

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