By Brian Nelson, CFA
With 2022 almost in the rear-view mirror, investors are expecting continued weakness into 2023. Millionaires are as bearish as they have been since the beginning of 2008, and we all know what happened during that year.
Inflationary pressures coupled with substantially weakened consumer spending as a result of the collapse in the price of cryptocurrencies, traditional asset allocation models such as the 60/40 stock/bond portfolio, and ultra-high yielding stocks with payouts north of 9%-10% have most investors worried about what might be ahead in 2023.
Still, investors have reason to be hopeful, in our view. The labor markets continue to hold up well, and the rate hikes that have pummeled equity, bond and real estate prices also act as future dry powder for the Fed to stimulate markets. At any time, the Fed can reverse its contractionary course. In 2023, we should start to see year-over-year increases in inflation slow, too.
In this article, let’s talk our top 5 stock ideas for 2023!
Alphabet (GOOG) (GOOGL) – Price-to-Fair-Value Estimate: 0.64
Alphabet’s shares have been hit by a double whammy as both tech and advertising-related equities have endured pressure. The company faces long-term threats from artificial intelligence (AI) chatbots, and while this may not materialize for some time, ChatGPT has shown the world that AI will be a game-changer for a lot of industries, particularly if chatbot revenue models come to fruition to challenge Alphabet’s search business in the long run.
TikTok has shown that it could disrupt Meta Platforms’ (META) business, and it’s not outside the realm of possibilities that ChatGPT or something like it could eventually disrupt Alphabet in search. We’re not getting ahead of ourselves in betting on any significant changes in the near term, however, and Alphabet may have a few AI tricks up its own sleeve. Shares of Alphabet look cheap, in our view, and it’s one of our top ideas for 2023.
Notes on technology: Apple (AAPL) and Microsoft (MSFT) dominated the last decade, and we expect them, along with Alphabet, to lead this decade, too. We’re not counting out large cap growth and big cap tech, despite a difficult year in 2022.
Enterprise Products Partners (EPD) – Price-to-Fair-Value Estimate: 0.86
We don’t typically like energy master limited partnerships (MLPs) much, but 2022 has served as a nice dead-cat bounce for many units. During the past 10 years, the ALPS Alerian MLP ETF (AMLP) is down by more than half on a price-only basis, and while MLPs continue to be very interest-rate sensitive, the energy markets have firmed up the past 12-18 months, serving to strengthen their backdrop.
Enterprise Products Partners started the overall trend in better disclosures with respect to traditional free cash flows across the industry, and we think the entity’s distribution yield of ~8% will attract more income-seeking capital in 2023. Though we’re mighty cautious on the MLP business model and tax implications are complicated when it comes to MLPs, Enterprise Products Partners finds its way into the top 5 stock ideas for 2023.
Notes on MLPs: Investors should be aware of the capital-market dependency risk of MLPs. In the event that energy markets weaken substantially in 2023, unit prices of MLPs could face outsized pressure, despite their toll-road-like operating models.
Korn Ferry (KFY) – Price-to-Fair-Value Estimate: 0.68
The global consulting firm continues to be in a sweet spot as organizations adapt to a changed world following COVID-19. The ebb and flow of the labor market will play into Korn Ferry’s business model, too, and fee revenue at the company continues to advance nicely.
We can’t be certain how the company’s business will be impacted in the coming quarters due to heightened geopolitical tensions, global inflationary pressures, potential recessionary conditions, and increased interest rates, but management is targeting a cut in operating costs to the tune of $45-$55 million, which should help to support earnings.
Shares of Korn Ferry are cheap, by our estimate, with a fair value estimate of $75 per share. Based on fiscal 2023 consensus earnings estimates, shares of KFY trade at ~10.5x. Though there are limitations to using the PE ratio, for readers looking for an ultra-cheap stock in 2023, Korn Ferry fits that bill.
Notes on consulting firms: Another solid idea for consideration in this area is Manpower (MAN), which offers a dividend yield north of 3.2% at the time of this writing.
Occidental Petroleum (OXY) – Price-to-Fair-Value Estimate: 0.86
Occidental Petroleum has benefited greatly as oil and gas markets recovered nicely during the past 12-18 months, and while we’ve preferred Exxon Mobil (XOM) and Chevron (CVX) in the simulated newsletter portfolios, Berkshire Hathaway’s (BRK.A) (BRK.B) stake in the company may give it less downside risk in the event that energy resource prices begin to face pressure if the global economy starts to slow materially.
Investing in commodity-tied equities is often boom or bust, but as it relates to 2023, we think Occidental may continue to deliver for shareholders. Shares look cheap, in our view, as our fair value estimate stands at ~$74 per share. One drawback is that Occidental’s dividend yield isn’t as attractive as that of Exxon Mobil’s and Chevron’s, but Buffett’s backing is something that may make up for the payout shortfall.
Notes on energy firms: Predicting the future direction of energy resource prices is nearly impossible. One only has to look to the depths of the COVID-19 crisis to see that benchmark oil prices even turned negative. That said, energy exposure within a well-diversified portfolio could make a lot of sense for some investors.
Tesla (TSLA) – Price-to-Fair-Value Estimate: 0.39
Tesla’s shares have been in a world of hurt as CEO Elon Musk makes headline after headline. Many investors have grown concerned about the entrepreneur’s recent foray into Twitter, and social media seems to think that demand for Tesla models could be weakening on the secondary market, perhaps an indication that primary demand could be slowing.
Musk has also been selling shares of Tesla seemingly to support his investment in Twitter, and it remains to be seen just how deep of a money pit Twitter becomes. That said, we think shares of Tesla are cheap. Rolling twelve-month trends in vehicle deliveries, free cash flow, and net and adjusted EBITDA remain impressive at the company. The first few months of 2023 could be difficult for Tesla’s share price, but its stock tailspin in 2022 makes it worth considering for 2023, in our view.
Notes on Tesla and the automaking industry, in particular: Any investment in Tesla or an automaker such as Ford (F) or General Motors (GM), more generally, is fraught with significant risk given the operating leverage inherent to their business models. Tesla’s shares will undoubtedly be highly volatile, and valuation multiples on automakers are still far below that of Tesla’s. We view Tesla as merely a speculative idea for the most risk-seeking investors in 2023.
Concluding Thoughts
2023 may be a difficult year to start for equity investors, but based on our technical assessment, we expect the S&P 500 to carve out a bottom and base in the 3,400 range, which may happen during the first quarter of the year. At that time, these five equities could be ripe for the pickings. Save for Tesla and Occidental, we include all of them in a Valuentum simulated newsletter portfolio.
Tesla’s abrupt share-price collapse during the month of December relative to its cash-based intrinsic value estimate, despite strong financials, is the main reason why it makes this list, while Berkshire’s ownership of Occidental creates what we would describe as an asymmetrical risk/reward situation as downside risk may be more limited for the company relative to other oil and gas entities given Buffett’s backing.
We hope you enjoyed our top 5 stock ideas for 2023! Remember — our favorite ideas are always included in the simulated newsletter portfolios, Exclusive publication, and within our additional options commentary. Happy New Year!
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Tickerized for GOOG, GOOGL, META, EPD, AMLP, KFY, MAN, OXY, XOM, CVX, TSLA, GM, F
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But how, you will ask, does one decide what [stocks are] “attractive”? Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth,”…We view that as fuzzy thinking…Growth is always a component of value [and] the very term “value investing” is redundant.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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