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Need to Know: Facebook, Alphabet and Twitter are among the worst internet stocks for investors right now. These are the best, says Citi.

Stocks are ready to ride out the last trading day of September — and the last day of the quarter — on a high note. But we say good riddance to the month that’s set to deliver the worst percentage declines in a year for the S&P
SPX,
+0.16%

and Nasdaq Composite
COMP,
-0.24%
,
which has been in the front lines of battling higher bond yields.

But while the Nasdaq continues to lag on the year, it’s still full of companies that Wall Street isn’t about to give up on. Our call of the day from Citigroup rounds up some of the best internet stock bets from the U.S. and elsewhere right now, giving the sector a thumbs-up.

“Against a backdrop of stepped-up regulation, geopolitical tensions and yet to be fully contained COVID-19 cases, we believe the internet sector will remain one of the more attractive options in global portfolio allocation given technology innovation and scale efficiency, and as investors weigh growth potential vs. risks,” said Citi’s Global Internet team, in a recent conference call with clients.

But not all of those stocks are a sure thing. U.S. analyst Jason Bazinet notes that investment banks and institutional investors are “just too bullish” on the strength of advertising dollars going forward for U.S. internet stocks. After a big growth rebound from the second quarter of 2020, Wall Street banks see even stronger ad growth going forward — $107 billion this year and $70 to $75 billion in 2022 and 2023, he said.

While the institutional investors credit that growth to a “new era of higher ad intensity for every dollar of economic activity,” Bazinet says it’s really down to a rebound in economic activity, but that e-commerce has “already rolled over.” For that reason, he isn’t recommending investors buy Google parent Alphabet
GOOGL,
-1.09%
,
Facebook
FB,
-0.31%
,
Twitter
TWTR,
-3.81%
,
Pinterest
PINS,
-3.04%

or Snapchat parent Snap
SNAP,
-3.57%
.

“We think investors would be far better served to buy Amazon
AMZN,
-0.45%

where we’re just a few quarters away from locking those difficult comps, and the stock has sort of underperformed because of those difficult e-commerce comps,” says the analyst.

He also highlights an under-the-radar segment that plays into that advertising, with companies like IronSource
IS,
-2.93%

or AppLovin
APP,
+1.99%

that are “just thriving” in the area of mobile game advertising. Wall Street estimates aren’t too high on the sector either, he says.

Citi also came up with a few China picks, as analysts weighed on the regulatory pressures the tech sector has been seeing this year. With e-commerce a key cog in the domestic consumption wheel, it’s probably least at risk from Beijing moves, said analyst Alicia Yap. That said, online gaming is a riskier subset and least likely to find government support because that spending doesn’t recirculate back to society, only to companies.

Citi’s top China picks include buy-rated e-retailer JD.com
JD,
-5.04%
,
“because it still has the user growth story” for active transaction users, and is one of few companies likely to see margin improvement trends in the coming year.

Citi also recommends Baidu
BIDU,
-1.36%
,
which Yap sees as less exposed to regulatory headlines. The company is also being granted a few smart city projects — a government aim to use technology to improve urban infrastructure and services. “That should demonstrate Baidu’s ability on ensuring the protection of data transfer and data storage, etc.,” said Yap.

Elsewhere, analyst Brian Gong said regulatory pressure probably won’t hit China video-sharing website Bilibili
BILI,
-3.25%

too bad. He’s positive on the stock “thanks to its healthy ecosystem, continuous growth on a user scale, and the decent potential on monetization.”

Other picks include Europe’s Delivery Hero
DHER,
-1.64%

and Just Eat Takeway
GRUB,
+0.94%
,
and mutilnational conglomerates Prosus
PROSY,
-0.37%

and Yandex
YNDX,
-0.63%

out of Russia.

The buzz

The Senate is due to vote Thursday on legislation that would narrowly avoid a government shutdown by keeping it funded into early December.

Federal Reserve Chair Jerome Powell will testify to a House panel on COVID-19 relief at 10 a.m. Eastern.

On the data front, weekly jobless claims and a revision to second-quarter gross domestic product are due ahead of the market open. In China, the official purchasing managers index contracted for the first time since early 2020, as the economy faces a power crunch and a property downturn.

Virgin Galactic
SPCE,
-3.55%

shares are surging in premarket trading, after the space-tourism company announced the end of an Federal Aviation Administration probe into its test flight with founder Richard Branson on board.

Longtime Tesla
TSLA,
+0.48%

bull Chamath Palihapitiya said he cashed out of the electric-car company “in the past year or so” in favor of new investment opportunities.

Rapper Kanye West’s “perfect hoodie” sold out within hours at retailer Gap
GPS,
+0.33%
,
and is now showing up on eBay, for well over the original $90 price tag.

Broadway hit “Aladdin” was canceled Wednesday night after breakthrough COVID-19 cases were reported among the cast, a day after the show reopened.

The markets

Stock futures
ES00,
+0.47%

YM00,
+0.46%

NQ00,
+0.54%

are pointing to a rally in the quarter’s end, with European equities
SXXP,
+0.19%

getting a lift and Asian stocks mostly higher. The dollar
DXY,
+0.12%

has eased off some, which is giving gold
GC00,
+0.06%

a boost, and oil prices
CL00,
-0.16%

BRN00,
-0.18%

are holding steady.

The chart

Are U.S. households overdoing that stock allocation? In a note to clients, JPMorgan strategist Nikolaos Panigirtzoglou noted a fresh record high for that in a recently released second-quarter U.S. Flow of Funds report.

“This Flow of Funds metric shown in Figure 7 shows clear overextension among U.S. households in terms of their equity allocation, thus leaving them vulnerable in a risk scenario where the previous uptrend in equity markets starts reversing,” said Panigirtzoglou.

Random reads

Army vet Eugene Bozzi says he’s trying to trying to adjust to life in the limelight after catching an alligator in a trash can.

A fire devastated an Edinburgh cafe used by J.K. Rowling to write her early “Harry Potter” books, but her favorite table miraculously survived.

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