UBS bullish on SMID cap stocks, rates KTB and ATZ as Buy

On Monday, UBS has maintained a positive outlook on the small to mid-cap (SMID) segment of the market, particularly focusing on softline stocks. UBS analysts have identified three growth stocks—Abercrombie & Fitch Co. (NYSE:ANF), Aritzia Inc . (TSX:ATZ), and Kontoor Brands Inc. (NYSE:KTB)—assigning them a Buy rating. Additionally, they have expressed confidence in the potential turnaround of Wolverine World Wide Inc . (NYSE:WWW) and Signet Jewelers Limited (NYSE:SIG), also giving them a Buy rating.

The firm’s optimism is supported by historical data, which suggests that portfolios focused on growth-related factors have yielded the most substantial returns over the past two decades. UBS has applied its proprietary HOLT framework to further analyze these companies, using cash flow return on investment (CFROI) as a primary indicator of profitability. For Kontoor Brands, InvestingPro analysis reveals a strong cash return on invested capital of 41% and an impressive return on equity of 71%, supporting UBS’s positive outlook. InvestingPro subscribers can access 7 additional key insights about KTB’s financial performance.

The analysis conducted by UBS involved a comprehensive review of historical CFROIs for their SMID cap coverage. They also examined forecasts and the discrepancies between the next twelve months (NTM) forecast and the implied long-term CFROI derived from current stock prices. The findings from this analysis have reinforced UBS’s bullish stance on Kontoor Brands and Aritzia (OTC:ATZAF), suggesting that these companies are well-positioned for future profitability based on their CFROI metrics.

Investors have been provided with a new perspective on the potential of these stocks, with UBS’s research indicating that Kontoor Brands and Aritzia, in particular, are likely to deliver strong financial performance. The firm’s methodology, which emphasizes the importance of cash flow metrics, suggests that these companies may offer a promising investment opportunity within the SMID cap space.

Overall, UBS’s note signals a vote of confidence in the selected softline stocks, highlighting their growth prospects and potential for delivering value to shareholders. The firm’s analysis underscores the importance of CFROI as a measure of company health and future success within the stock market. Kontoor Brands’ financial health score on InvestingPro is rated as "GOOD," with particularly strong profitability metrics and a current ratio of 2.5, indicating solid liquidity. A comprehensive Pro Research Report is available for KTB, offering deeper insights into its financial performance and growth potential.

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