Welcome to January! The season of holiday gifts… yet-to-be-broken resolutions…
…And the unsolicited nuggets of investment advice.
Investors can be forgiven for ignoring the counsel this year. As James Mackintosh of the Wall Street Journal put it, analysts nailed earnings forecasts in 2022 and then completely missed the massive bear market.
“You can be exactly right and dead wrong at the same time.”
Many of my own Moonshot picks suffered too at the hands of an aggressive Federal Reserve. My no. 1 choice POSaBIT (OTCMKTS:POSAF) and no. 3 Ethereum (ETH-USD) fell 43% and 67%, respectively, even as the former posted record results and the latter dominated the world of non-fungible tokens (NFTs).
Nevertheless, 2022 still had many bright spots. My no. 2 pick Volt Information Sciences rose by over 107% (before being acquired by Vega Consulting in late April), while plenty of other recommendations like Enservco (NYSE:ENSV) saw massive 500%-plus spikes in the energy price run-up. And though I didn’t get out at the top of the crypto market, my mid-year firesale helped my portfolio escape another 40% fall in Bitcoin (BTC-USD) prices and the total collapse of exchanges like FTX (FTT-USD).
For an analyst tasked with identifying longshot investments, 2022 could have gone far worse.
How to Invest in 2023
So, how should we invest in 2023 to avoid the same mistakes of 2022?
Start with what we do know: a recession is likely this year.
The signs are flashing brighter than Rudolph’s nose at a Christmas concert. High inflation… job cuts… smaller holiday gifts… If we aren’t already in a recession, we’re likely to be in one soon.
But then, things get trickier as confounding factors enter. And why market analysts can often be so right, and yet so wrong.
In a perfect “soft landing,” America avoids a deeper downturn. In this version of the future, cyclical stocks will soar, and Jerome Powell gets remembered as a genius. Investors in Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN) could quickly find themselves owning trillion-dollar companies by the end of 2023.
In an alternate universe, the Fed, or its international counterparts, unintentionally triggers a deeper global recession. That would mean non-cyclical stocks like American Water Works (NYSE:AWK) will outperform. Even if you can’t afford a new Tesla, you still need to flush the toilet!
So, how can investors protect themselves in both cases?
Protect Your Investments in 2023
That’s where an investment in consumer and healthcare stocks comes in. According to a long-term study by Fidelity Investments, a combination of 1) consumer staples, 2) consumer cyclical, and 3) healthcare is the best way to outperform in both a recession and an early-stage business cycle. Telecom and utilities will outperform in a recession only. And because we don’t know when the recession will end, this provides us with the safest way of protecting a portfolio during a downturn, while avoiding a potential market recovery.
That said, investors still need to stay selective. Some consumer staples companies like Costco (NASDAQ:COST) and Walmart (NYSE:WMT) have already been bid up to rich valuations, reducing their potential upsides. Others like tobacco giant Philip Morris (NYSE:PM) have found themselves on the wrong side of history. These types of stocks will struggle to break higher, even as economic growth returns.
That means investors should favor low-valued stocks going into 2023 — the types with a limited downside in an economic recession, and plenty of upside in an alternate case.
10 Stocks Under $10 for 2023
To identify these ten high-potential stocks, I’ve run my Profit & Protection quantitative investment system on all U.S. listed stocks from the three sectors listed above. The top companies are then checked for their underlying performance and listed below.
1. RealReal (NASDAQ:REAL). This e-commerce business for used luxury goods uses a vast network of local consignors to gather, grade and price incoming inventory. It’s a system that has helped RealReal differentiate itself from peer-to-peer competitors like eBay (NASDAQ:EBAY) and achieve supernormal growth. Analysts expect REAL to generate another 28% in revenue growth to top off last year’s 57% increase.
The company, of course, is as risky as they come. Shares trade for around a dollar and the e-commerce outfit could realistically go bankrupt before minting a single shred of profits.
Still, history tells us that these all-or-nothing cases tend to outperform over the long run, provided you place enough bets to mitigate the risk. A sparing bet in the cheapest stock on this list could help supercharge a portfolio at relatively little cost.
2. Harvard Biosciences (NASDAQ:HBIO). This laboratory and testing equipment firm is a “picks and shovels” play on the biotech industry. 2022 revenues are virtually unchanged from 2019 levels, while shares trade at around a 20-25% discount from historical averages. A market recovery in 2023 should help shares rise back into the $4 range.
That said, the firm is still risky at best. Harvard Biosciences reinvests less than its peers in creating new products, putting it on a long-term fundamental path to obsolescence. And a prolonged slump in the biotech industry could create more unexpected losses for HBIO. But much like RealReal, history tells us that it’s firms like these that tend to outperform when market recoveries eventually happen.
3. Latham Group (NASDAQ:SWIM). One of America’s largest providers of pool products is also one of its cheapest. Shares trade for only 6X forward price-to-earnings and 0.5 times price-to-sales on account of lower forecasted 2023 profits. Wall Street expects net income to drop 33% next year as customers pull back from large discretionary purchases.
Still, consumer cyclical stocks don’t stay down forever. The same analysts are expecting 2024 profits to return to normal. And with shares at only $3, Latham Group is a compelling bet on America’s eventual return to better times.
4. WW International (NASDAQ:WW). The profitable weight loss firm trades as an equity stub sitting on a mound of long-term debt. It’s a double-edged sword that propelled shares into the $40 range in 2021, and then sent the stock under $4 where it remains today.
That makes it a particularly attractive bet for risk-seeking investors who believe 2023 will see a milder-than-expected recession. For every 10% increase in WW’s enterprise value, its share price goes up by a stunning 56%. And on the downside, the most you can lose is… well… $4 per share.
5. Tupperware Brands (NYSE:TUP). The Orlando-based direct seller of food storage and kitchenware has only been cheaper once in its years as a public company during March-April 2020.
Today, shares of the firm are once again trading at these record-low figures thanks to a pullback in analyst expectations. Wall Street now expects TUP to generate only $1.2 billion in 2023 revenues and 90 cents EPS compared to prior expectations of $1.9 billion and $3.8 EPS a year ago.
Still, direct-selling models are surprisingly resilient. According to data from IBISWorld, the direct-selling industry grew another 4.3% in 2022 to cap off a decade of expansion. Provided Tupperware can avoid the missteps of other “pyramid-scheme” companies, shares could easily rise 2X from current levels.
6. DarioHealth (NASDAQ:DRIO). The New-York based healthcare firm has long focused on creating health tools for direct-to-consumer sales. Products include glucose monitoring kits and other connected devices. In 2020, the firm began expanding into business-to-business (B2B) sales. Revenues this year are now expected to be almost 4X higher than before and analysts expect another 25% growth in 2023.
Shares, of course, are cheap because the firm has been unprofitable since 2011. It could take another three to four years for the firm to break even. But if history is any guide, a faster-than-expected stock market recovery could send DRIO’s stock up 100% or more in short order. Companies that have found a cheap way to scale up rarely stay unprofitable forever.
7. HanesBrands (NYSE:HBI). The vertically integrated maker of underwear and other innerwear is a surprisingly cyclical stock, at least from a valuation standpoint. Shares have traded as low as 5X forward P/E and as high as 20X.
Today, the firm trades at only 5.4X forward P/E, a near-record low. And with Street estimates pointing to a stabilization in 2023 revenue and EPS, investors should consider what would be my no. 1 pick for 2023.
8. Carnival (NYSE:CCL). The cruise line owner/operator now trades at half its pandemic-era lows. At the same time, 2023 operating earnings are now expected to return to 2019 levels. According to the Profit & Protection system, it’s these types of turnarounds that tend to do well over the next twelve months.
Investors should remain cautious, of course. Carnival’s fleet is unsellable during crisis periods, making a sum-of-the-parts valuation largely useless. But for risk-seeking investors, this is a bet that’s looking more attractive to make.
9. Lifetime Brands (NASDAQ:LCUT). The kitchenware and tableware firm is a relatively stable play on consumer demand. Revenues rose 4.7% in 2020 as customers shopped for home goods, and then continued going up another 12% in 2021. The firm owns household brand names from Pfaltzgraff to Mikasa.
2022 will be a tougher year, with rising retailer inventories sending sales back down to 2019 levels. LCUT shares have dropped almost 60% as a result. Still, the New York-based company has seen this story before. Each time its stock has fallen below $10, it has eventually returned to the $15 range as demand recovers.
10. Under Armour (NYSE:UAA). The former high-flying maker of sportswear and sneakers finds itself in the “value” dustbin after three bruising years of sagging sales. Shares are down 62% since mid-2019, and analysts are expecting a 20% decline in EBITDA for 2022.
Yet, like most of the companies on this list, Under Armour still has some fight left in it. Street estimates are now calling for a 29% recovery in net income for 2023. And competitors like Nike (NYSE:NKE) are slowly reporting easing supply gluts. Investors might have to wait longer on this firm, but an economic recovery should send shares back into the $15-20 level. At the time of writing, UAA stock is already inching up to the $10 price mark.
Conclusion: How to Invest in 2023
For investors looking to invest in 2023, it helps to view the stock market as a dog on a leash. The dog-walker (i.e., a company’s fundamentals) will tend to keep a predictable, steady pace. Market analysts excel at forecasting these things.
Meanwhile, the dog itself (i.e., a stock’s price) might run ahead…
Then fall behind…
And then get distracted by a squirrel…
It’s these price actions that analysts are generally poor at forecasting. When investor emotions are involved, prices can detach from the fundamentals for a while.
The dog/dog-walker situation is also why certain sectors do well in specific market cycles. Investors seeking “safe havens” stocks will often rush into the same trades, driving prices away from their long-run values. The same holds true for growth stocks, real estate, bonds and more. And investors who recognize this will perform far better in 2023, a year where the only certain thing is that markets will be uncertain.
— Tom Yeung
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Source: Investor Place