Investors are optimistic in the early start to the year as the S&P 500 has rallied over the past two days.
Still, the headwinds that created a volatile 2020 continue to loom over 2021, including spiking Covid-19 cases in the U.S. and abroad as well as lockdowns in major economies such as Germany and the U.K.
Andrew Smith, chief investment strategist at Delos Capital Advisors, on Tuesday explained his road map for the new year.
"We've been kind of coining this market as a pause that refreshes," Smith told CNBC's "Trading Nation." "If we go back to November, we had that great rotation day in the first week, but the S&P is only up about 1.5% to 2% since that time. So during those consolidating moments, we do see corrective or volatility spikes, and we think that's the name of the game given the uncertainties."
Even with the uncertainties, though, Smith sees some bright spots in the market.
"What we're looking to increase our exposures to are really in the cyclical space," Smith said, naming financials, industrials and materials as three sectors with opportunity. "We want to invest in companies that have good growth aspects."
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Within the financial and industrial spaces, for example, Smith pointed to fintech-focused Fiserv and garbage disposal company Waste Management as two buys. Fiserv has rallied 57% since its March lows, and Waste Management 39%.
His final pick, GameStop, is a play on consumer strength. He said a transition to digital purchases and downloads, the new generation of consoles and stimulus checks could be tailwinds for the video game retailer. GameStop has surged more than 630% since its lows last April.
On the flip side, Smith highlighted three stocks that could come under pressure.
"We want to avoid ones that are inflation sensitive ... and we know that commodity prices really lead headline inflation," Smith said. "So the names that we picked that were darlings of last year but won't do well under an accelerating inflation regime would be names like Home Depot, names like Best Buy, names like Kroger."
Home Depot, he said, could weaken as inflation accelerates. Its stock has rallied 22% in the past 12 months.
As for Best Buy, he said the work-from-home rush may have pulled forward demand for laptops and other electronic goods. On Kroger, he said a return to dining outside the home and a lack of an online delivery presence could put the pressure on that stock. Both stocks have fallen over the past three months.
Disclosure: Delos holds shares in GameStop and Waste Management.
