We recognize the paper losses suffered last year are very much real, but downturns, corrections and even Bear Markets are a normal part of the investment process, observes John Buckingham, value-oriented money manager and editor of The Prudent Speculator.
On the other hand, rebounds, rallies and Bull Markets tend to occur with equal frequency. So we always remind ourselves that the secret to success in stocks is to not get scared out of them.
For the past 45 years, we have remained steadfast in our commitment to fishing in the Value pond and we see little reason to depart from our longstanding practice of owning a broadly diversified set of stocks trading for discounted relative valuations in 2023.
After all, the valuation gap between Value and Growth is still very wide, with earnings multiples of the former below the long-term average and the latter priced above, despite the performance disparity in 2022.
We think our unique and disciplined approach to navigating the equity markets will continue to serve us well as we believe that there is plenty of Value available in individual stock picking. That in mind, we detail seven themes and specific stocks which we think those who share our long-term view should be considering as we head into 2023 and beyond.
Quality Merchandise on Sale
Given the price of the average stock has been in a Bear Market, most have endured significant selling pressure this year, often with little regard for the long-term business prospects or the caliber of the company. No doubt, there are headwinds facing much of Corporate America, but we think there are opportunities today to pick up ownership of higher-quality, well-known companies at attractive price tags.
Networking equipment titan Cisco Systems (CSCO), asset management giant BlackRock (BLK) and diversified healthcare concern Abbott Labs (ABT) stand out as leaders in our qualitative review process. Yes, the quality label is somewhat subjective, but each of these reasonably priced names has a long-term credit rating from Standard and Poor’s of “AA-” or better and a share price down more than 20% in 2022.
Marked Down Megacap Darlings
Though Meta Platforms (META) is the only one of the four trading at a fire-sale price tag, the social media powerhouse, along with search-engine leader Alphabet (GOOG), consumer electronics king Apple (AAPL) and software power Microsoft (MSFT) have all seen their stocks battered in 2022 (after posting enormous gains in 2020 and 2021).
Certainly, the economic slowdown, along with the massive scale of their businesses has weighed on investor psyches, but we think all four companies very much offer growth at a reasonable price, along with substantial free-cash-flow generation that allows for significant investments in new ventures, enhancements to existing products and services, and generous capital return programs.
Consumers are Still Hanging In
We think the consumer is in better shape to weather potential storms on the horizon than what many battered share prices would suggest. Of course, equity market traders often shoot first and ask questions later, so most everything having to do with the consumer was hit hard in 2022 on the view that consumer spending will soon dry up.
We respect that the near-term is very uncertain, but we think fickle investors will again return to beaten-down consumer discretionary stocks like they did after a COVID-19 crash in 2020. In our view, some of the hardest-hit stocks, like discount superstore operator Target (TGT), toymaker Hasbro (HAS) and department-store retailer Nordstrom (JWN) are poised to rebound.
The Fed Punches a Hole in the Punch Bowl
The decidedly less accommodative Fed has led to sharply higher interest rates across bond land, but this should benefit regional banks like Citizens Financial (CFG) and Bank OZK (OZK) that derive a significant portion of their income from the spread on interest earned from loans versus the costs paid on deposits.
Yes, increases in short-term rates could affect funding costs, but we note that many (if not most) banks in our universe boast significant deposit balances relative to the loans on their books, so they have less of a need to aggressively raise incentives to attract more money.
We respect that many are worried that the Fed will not be able to engineer a so-called soft landing for the economy and that a recession will result, but most bank balance sheets are in fantastic shape, with plenty of loan-loss reserves and low levels of non-performing assets.
In addition, the large money-center banks like Bank of America (BAC) and JPMorgan Chase (JPM) have diversified revenue streams and reach extending to corporate and municipal issuers looking to finance investment at still relatively cheap rates.
EV’s are Accelerating … But Fossil Fuel is not Going Away
Despite starting very far behind, the major automakers are racing to catch up in electric cars and are deploying the capital necessary to make it happen. Governments are getting a move on, too, funding infrastructure improvements, providing consumer subsidies and offering tax breaks.
Such enthusiasm also presents a nice entry point for Albemarle (ALB), a power play in the EV gold rush. The lithium producer announced plans in 2022 to build a new lithium processing plant in the U.S. that will double the amount of the EV battery metal that it presently produces, while the bottom-line has been exploding.
The EV boom does not mean conventional energy businesses are dead. We expect a flat-demand environment with tightening supply will result in higher prices overall, and therefore enhanced profitability for the likes of Civitas Resources (CIVI) and EOG Resources (EOG), which also boast lucrative variable dividend payouts.
It's a Great, Big World Out There
While foreign market performance was healthy in 2021, it generally lagged the major domestic indexes, and returns in 2022 were not great, including in Europe. As such, we think significant opportunities exist to pick up selected and what we believe to be temporarily very depressed bargains.
Diversification by geography is valuable, in our view, and fairly simple to implement, especially with American Depository Receipts (ADRs) traded on U.S. exchanges and foreign operations embedded in the multinational income streams for many of our U.S.-based holdings.
We take advantage of this ability with our ownership in a variety of foreign companies, from German parcel carrier Deutsche Post (DPSGY), which derives 80% of revenue outside the Americas, to French drugmaker Sanofi (SNY), which earns two-thirds of its revenue abroad, has a robust therapeutics pipeline and sports reasonable valuation metrics.
The operations of ManpowerGroup (MAN) are based in the U.S., while 67% of revenue is derived from Europe. The staffing services provider has deftly navigated previous expansions and contractions across the Continent, rewarding shareholders with sizable profits and generous dividends through thick and thin.
Good Things Come in Small (and Mid) Packages
Our all-cap Value flagship strategies include small and mid-cap names, but we also offer our asset management and wealth management clients a managed account strategy that specifically caters to Small-and-Mid-Cap Dividend (SMiD) stocks. The forward P/E ratio on the SMiD portfolio is near 10, compared with 18 for the Russell 1000 index and 15 for the reasonably priced Russell 1000 Value index.
Considering our SMiD strategy, several names we highlight for 2023 and beyond are industrial battery producer Enersys (ENS), railcar manufacturer Greenbrier Cos (GBX), optical and photonic product supplier Lumentum (LITE) and homebuilder MDC Holdings (MDC).
While historically more volatile, we like small- and mid-cap stocks for their enhanced upside potential, in addition to the generally less expensive valuations. Our go-anywhere approach allows us to find Value across the equity universe and we think the SMiD pond is presently a well-stocked one in which to fish.
We are buying our undervalued stocks for their three-to-five-year or longer potential, with the intention of holding them through a business cycle or two. We think the market is offering those with long-term time horizons substantial opportunity as evidenced by the litany of names mentioned above, while most offer generous dividend payments, with that income helping investors better navigate the inevitable volatility of the share prices.