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A General Prognosis 

The New Year could herald a tumultuous start for stock markets. Deutsche Bank recently predicted as much as a 25% fall to equity markets as the bear market continues into Q1. This sentiment has been echoed among major players such as Goldman Sachs and Morgan Stanley, who anticipate limited performance in the early stages of next year. With such a hawkish Federal Reserve and no easing in sight here are some stocks that may provide some safety for portfolios moving into 2023.  

 

META 

Meta has been all but devoured in 2022. It has lost over 70% of its share price, been forced into massive layoffs and just cannot quite seem to find the technological foothold in the Metaverse it needs to bolster its bold rebrand. Facebook naysayers have clearly enjoyed the former tech giant’s fall from grace, which has largely been about investors taking fright at the cash burn from the Reality Labs project, which continues to grow to beyond $10bn a year However, while the company is certainly experiencing a reputational crisis, there may be positives after such a brutal rerating.  

Its dominant position in social media remains relatively secure - assets such as Instagram, WhatsApp and Facebook are still incredibly valuable despite earnings disappointments in 2022. The success of Instagram Reels as a rival to TikTok shows Meta can adapt its suite of products. And it still has huge reach. Moreover, after the third quarter earnings and cautious guidance for the year ahead, there are signs that management is listening to investor fears. Mass layoffs, lower capex spending and a renewed focus on capital discipline were promised. Nevertheless, the question over the Metaverse spending is still open: when does it lead to returns and until then can you as a dutiful fund manager be prepared to risk capital that could just get burned? 

 After the level of pessimism towards Meta, it could be in a prime position for a comeback in 2023. The stock looks undervalued  it trades at a historically cheap 12x earnings, suggesting investors have attached a discount due to uncertainty over the merits of the metaverse bet. Moreover, there is a chance TikTok faces a ban in the US, a move that would undoubtedly support Meta’s core social media products. Meta releases its earnings report on February 1st, which will be the first indication of the kind of performance to expect for the rest of the year. 

 

BT Group 

BT Group is a very interesting stock for longer-term investors. The share price has taken a real beating over the past quarter, sliding by around 40% since July. An enduring pension shortfall, rising wages, the first strike in 35 years, soaring energy costs, cut-throat competition in home broadband, and the ever-increasing investment in Openreach have seen investors lose confidence despite adjusted earnings rising 3% in the half-year to September 30th.  For those not in the know, the company is legally obliged as the designated Universal Service Provider for the UK to spend billions of pounds improving the fidelity of the UK’s network infrastructure. This means that the company must divert valuable working capital into maintaining and building the network. The group has targeted increased cost savings from £2.5bn to £3bn by the end of 2025, but higher capex as a result of a £200m jump in energy bills hasn’t helped. 

Investors remain bearish, believing returns will remain lacklustre while it is burning free cash in an endless cycle of investment and, at least in the short term, they may have a point. However, this situation may present an opportunity for investors with a longer time horizon. Near-term staffing cost pressures should abate, though this remains a short-term headwind for the stock with wages accounting for a third of its operating expenses.  Present investment may equate to future returns for BT. The fibre and 5G networks that are being built will be the technological backbone of the UK for years to come (at least a decade). BT’s price to earnings ratio is currently just over 7 and its share price is close to all-time lows, making it perhaps one of the most undervalued blue-chip stocks in 2022, with a dividend yield now in excess of 6%. The question for investors is whether BT can defend its dividend whilst continuing to invest in Openreach effectively. We can check on BT’s P/E ratio again on February 2nd when its next earnings report is made public. Meanwhile Altice’s Patrick Drahi hovers and may yet make a bid. 

 

Mastercard & Visa 

If there is one type of company which can fare well in times of high inflation it is those that rely on transaction fees. Payment processing companies like Mastercard and Visa possess an enviable resistance to the pressures of inflation. This is because when consumers are forced into paying higher rates for their typical baskets of everyday goods and services, payment processors take the same percentage cut of the higher amount; making revenue increase. We saw this in 2008 where Mastercard’s revenue spiked in growth while the rest of the market crashed and burned; since then, MA continues to exceed predictions with earnings as shown in the chart below. Mastercard remains a top pick for hedge fund managers like Chuck Akre and was recently named a top pick by Goldman Sachs. The general analyst consensus for Mastercard across the market is a strong buy.  

Equally, in 2012 when real income dropped pretty universally, Visa’s revenue growth remained unaffected. Robert W. Baird has maintained its buy rating for Visa over several months now and it’s easy to see why. Visa has consistently beat earnings expectations, outperforming the average estimate for the last 7 consecutive quarters; not many companies can say that, particularly in times of a pandemic downturn. Mastercard may trade at a higher stock price than Visa, but with its earnings per share growing at a faster rate and a lower p/e ratio, it’s anyone’s guess which of the two blue-chips will yield better over the next four quarters. For traders who are worried about the potential market upside generally in 2023, the historic datapoints may highlight transaction fee-based businesses such as Mastercard and Visa as safe havens once again.  

If inflation is positive for these stocks on a relative basis, cooling inflation might see them underperform. If the Fed is too successful in quelling inflation it will of course have spill over effects into the percentage based bottom lines for Mastercard and Visa as consumer spending increases at a slower rate. However, despite some signs inflation may have peaked, it is likely to remain elevated all throughout next year.  Both Mastercard and Visa are expected to release earnings on January 26th. 

 

AMD 

Computer processors and graphics technologies company Advanced Micro Devices Inc. (AMD) has done extraordinarily well in recent memory. AMD has made strides past its main competitor, Intel, surpassing it in market capitalisation for the first time this year. AMD tripled its revenue to over $2 billion from 2017 to 2021 and between 2020 and 2022 equity in AMD netted over 300% returns for investors. However, unfortunately those good memories started to fade with corona-virus fears and in 2022 AMD has lost nearly half its value YTD. Does this nosedive spell disaster? Or is the industry leader simply gathering momentum to rise from the ashes of an undervalued state? Well for starters, it is important to remember that this selloff has not happened in a vacuum; NVIDIA down 42%, Intel down 52%, Micron Technology down 33%. The whole sector has taken a hit, and this is not necessarily indicative of anything wrong with AMD specifically. Drops were fuelled by globally disrupted supply chains, raging inflation, surging energy prices and general pandemic uncertainty. Particularly as it pertains to AMD, the looming possibility of chip shortages and waning demand for personal computing; neither of which we have seen materialise to the extent covid fear-mongers portrayed. The consensus among analysts today seems to be very much gravitating toward a positive rerating, with optimistic price targets reaching as high as $200, which would be over an 170% rise.  

AMD benefits from the continued growth of computer processing sector and a diversified revenue model. The global semiconductor chip sector is predicted to grow to a trillion-dollar industry by the end of the decade. AMD is involved in PC manufacturing, cloud computing, computer gaming and embedded software solutions – all areas that have experienced exponential growth in the past decade. Overall AMD has yet to be usurped by new silicon processing technology and its embedded software solutions are becoming an increasingly profitable sector of their business. It’s safe to say that AMD is here to stay and may make an attractive value stock for 2023. AMD is estimated to release earnings on the 2nd of February.  

 

Apple 

Speaking of silicon processors, it is unsurprising to find tech giant Apple on this list. Despite rerating this year as it was caught up in the broad tech stock selloff, Apple is the most valuable company in the world by market cap and seems to just go from strength to strength as it continues to report revenue growth year upon year. Throwing its weight around recently, Apple has threatened to pull manufacturing out of China, prompting some uncertainty fuelled selloffs; a move that may see reversal as China announces easing on zero covid policies. However, even with an 18% fall in stock value YTD, Apple is undeniably a golden goose. Apple comfortably doubles Microsoft’s revenue and then some; boasting revenue figures over 5 times the industry average. It consistently outperforms the S&P500 by almost every measure and touts a respectable 56% return on invested capital. 85% of analysts rate Apple a buy in the current market, even the most pessimistic of predictions cannot bring themselves to forecast a fall in value for Apple stock in the long term.  

Particularly with the success of its emerging financial endeavours and high adoption of Apple Pay amongst its users (92% of all the mobile wallet payments done in 2020 in the US were made with Apple Pay) we see how Apple effectively glues customers to its products. Apple’s ecosystem is certainly a deft seductress for consumers and investors alike. Apple Pay Later is likely to only accelerate this trend as Apple underwrites and funds its first internal loans. One of the reasons that Apple continues to fare so well, even through rocky market conditions, is that its products and services are incredibly sticky and stick to each other. Revenues from Services, with its outsize margins, have underpinned a higher multiple for the stock and this division continues to offer upside.  

As we move into 2023, we can only expect Apple to continue to hold its own in just about every facet of the digital landscape. Even in the cases of an equity valuation stumble, when it comes to Apple, investing on a dip has historically rarely been a bad move. Apple recently doubled down on research and development, increasing its budget by $4.3 billion - That’s more than the annual GDP of Seirra Leone. All indications lead us to expect a maintained commitment to the development of more tantalising technology in the future and further growth for the innovative behemoth. Apple will release earnings early next year on January 26th. 

 

Costco 

Costco may not have the most exciting YTD charts or the most explosive revenue growth, in fact COST has had rather disappointing sales figures for November; only increasing by around 5%. However, as 2023 stock predictions become flatter across the market, dependable stocks are becoming an increasingly viable option, particularly in a well-diversified portfolio. Costco is just that: steady and reliable. More importantly, it pays out a $3.60 dividend per share which makes it very much a tortoise in a market full of hares. It may not boast the volatility gains of an asset class such as cryptocurrency but in 2023 that will likely work in Costco’s favour. At the very least, Costco is outperforming the S&P500 on average this year which bodes well. Yahoo Finance even recently announced Costco as its company of the year. Senior Research Analyst Oliver Chen says, " Costco just screams value, treasure hunt, that 4.99 rotisserie chicken.” Not sure what that last one means for the market, but the sentiment here is clear with an attached price target of $650; a 74% increase. UBS analysts have said, “Altogether, we think COST has every right to win this holiday season & beyond.” For good reason too, Costco’s earnings per share outperforms competitors by an impressive 406% overall and its revenue, despite recent disappointments, is still over 20 times higher than what is typical in the sector. Perhaps Costco’s comparatively lacklustre revenue growth can be partially explained by its colossal size.  

The dependable revenue growth and solid business model keeps Costco predominantly floating in the green, a characteristic that investors may find themselves retrospectively craving by the time we pass a third quarter of consistent red elsewhere in 2023. We still have not seen Costco’s December earnings report, but it is likely to sing the same tune as always, that Costco is a steadfast port of safety to hide in when the rest of the market struggles.  

 

Microsoft 

The general market declines of 2022 have hit Microsoft rather hard; prompting the loss of over a quarter of its stock valuation. However, to many investors and analysts this newfound value has only made it a more attractive prospect. Microsoft is incredibly embedded into the functions of the modern world and has quite a few exciting developments in the works for 2023 and beyond. One thing can be said with a high degree of certainty: Microsoft is not going anywhere. 

Windows OS is still the world’s primary operating system; accounting for over 70% of the market globally as of August this year. It has held this dominant spot for over a decade. Microsoft is a market leader in the enterprise resource planning (ERP) software space. Microsoft’s cloud presence is second only to Amazon Web Services, boasting an impressive 21% of the market that will continue to expand as they plan to move into 11 additional regions globally. Microsoft has also seen considerable growth in its gaming divisions as the Xbox brand holds its own against Sony and Tencent. An Activision Blizzard acquisition on the table in 2023 meant that Microsoft’s gaming market share was only set to grow, although with the Federal Trade Commission stepping in, the future of the deal is uncertain. MSFT had offered further concessions to push the potentially anti-competitive merger through. As legislators have doubts about the stranglehold that the deal would give Microsoft over the gaming industry, the company has declared that should it go through they will commit to giving access to the Call of Duty IP to competitors for a minimum of 10 years.  

Right now, Microsoft stock could arguably be trading at a discounted value, perhaps not in the context of the industry but certainly in the context of its own historic performance. For example, Microsoft's forward price/earnings per share (P/E fwd) multiple is currently 25.71x, which is higher than average for the sector, but lower than its five-year average of 29.11x. This could indicate that at least compared to past performance, MSFT is looking a little undervalued. Microsoft also routinely outperforms the technology sector in both revenue and earnings per share on average. All these factors could make it an attractive tech buy for 2023 despite it not looking like a big year for growth stocks. Analysts certainly seem to think so, with nearly 90% ranking Microsoft as a buy. Goldman Sachs has reiterated this, saying that beaten-down software names like Microsoft are attractive buys. We will be privy to more information as Microsoft reports its earnings on the 24th of January.  

 

Lloyds 

Lloyds has been touted as a value stock for years, with some analysts calling for a revaluation and uptick in stock price for the past decade. Admittedly though, this notion does not necessarily scream ‘must have’ as a stock for 2023; if it hasn’t happened yet, why should it happen in a year where recession is so likely? This is the definition of a value trap. However, despite the general market downturn and high inflation, Lloyds’ stock has beaten the odds over the last 12 months; with some gains since October. The P/E ratio is also below average at under 7 which certainly corroborates the idea that Lloyds may be undervalued. What really makes Lloyds attractive for 2023 is resilience against the market thus far. Lloyds has outperformed the FTSE100 consistently over the last 6 months and offers a dividend yield that exceeds the industry average by around 25%. Adrian Gosden, manager of the GAM U.K. Equity Income Fund, highlighted Lloyds as a particularly undervalued stock. Former Barclays executive Cathy Turner recently acquired £0.2 million of the stock in one of the largest insider purchases of the last year; from a market veteran this obviously speaks to the viability of the stock moving forward. 

However, doubts around Lloyds are inevitably tied to doubts pinned on the UK in general. Chief executive of Lloyds Banking Group Charlie Nunn said, “There is nervousness at the moment about the UK... around the lack of stability that we’ve had,” when he spoke at the Financial Times’ global banking summit on Dec 6th. With political uncertainty and more specific events tied to Lloyds such as the HBOS fraud scandal and the £790 million fine that went along with it, the UK financial sector and Lloyds by extension, have been avoided by investors despite the potential for value. It is unclear when Lloyds will pick up momentum towards a more sensible valuation but until then we can look forward to its earnings report which releases on the 23rd of February.  

 

Alibaba 

The S&P China 500 is down 26% YTD amid tightening covid restrictions. Senior Consultant Antonella Teodoro says: “China’s Zero Covid approach is impacting production and manufacturers are seeking... alternatives to the current ‘factory of the world.” The National Bureau of Statistics of China has reported declining manufacturing PMI for the second consecutive month and things have looked shaky for the secondary sector-fuelled economy for some time now. Wang Zhe, senior economist at Caixin Insight Group says: "Since October, the impact of COVID outbreaks has taken a heavy toll on the economy, and the challenge of how to balance COVID controls and economic growth has once again become a core issue." However, with officials promising relaxation to zero covid policy we have seen American listed Chinese stocks like Alibaba experience some resurgence. December has seen BABA rise nearly 4%, NIO up 6% and XPEV up 12%. Unfortunately, as is usually the case when it comes to uncertainty, these rises have been short-lived with some immediate market pullback in the following days. The market clearly wants to believe in Chinese stocks, but volatility is sure to follow until we see how new policy decisions affect the number of coronavirus cases in China. 

For those bullish on China in general, Alibaba is certainly a good place to start. Its revenue is double the industry average and is also growing at a much faster rate than most other industry players. Earnings have exceeded analyst predictions the last 3 consecutive quarters and analysts seem extremely bullish. Out of 15 surveyed analysts, not one of them deviated from a buy rating, making it the strongest ‘strong buy’ on this list. Hedge funds are less optimistic however, with lots of sell activity happening behind the scenes; no doubt fuelled by the same uncertainties outlined above. BABA is undoubtedly a strong company and earnings will release on February 23rd, but even with that information, the stocks fate is intrinsically tied to wider perceptions of where China is headed generally.  

 

 

 

 

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