If the investment theme in 2021 is the rebound after the new crown epidemic, and the theme in 2022 is to deal with inflation, then 2023 should be regarded as a year when investors go all out for the economic downturn. “It’s true that the chances of us going into a recession have increased,” said Ramiz Cherat, portfolio manager at Vontobel’s Quality Growth Boutique. Indeed, among the world’s largest In a recent survey by the Conference Board, a whopping 98% of CEOs surveyed said they were preparing for a U.S. recession in 2023.
Ultimately, inflation fueled recession fears and prompted the Federal Reserve to keep raising interest rates, threatening corporate profits and pushing stocks into a bear market over the past year. One sees a glimmer of hope that inflation has finally peaked, but the mantra for 2023 remains cautious.
Still, while ordinary investors may only be feeling the pain, investment professionals see opportunity. According to Lori Keith, head of research and portfolio manager at Parnassus Investments, investing in 2023 is “really about quality”—in other words, the companies we invest in “are not just able to withstand more severe , a longer-lasting recession (should that happen), and the ability to be proactive when it finally sees a reversal in the Fed’s rate-hiking strategy.”
For amateurs and professionals alike, discovering these high-quality stocks may require a change of mindset. Eric Thornstein, managing director and portfolio manager at Jensen Investment Management, said he has been adjusting his thinking when evaluating stocks, focusing more on profit margins rather than revenue growth. Given the Russia-Ukraine conflict and continued high inflation, and the possibility of more rounds of rate hikes ahead, “I don’t think the environment is easy to achieve top-line growth, (and) it will continue for some time,” he said.
Against this backdrop, Fortune asked five top portfolio managers to pick the best stocks to invest in for 2023. The stocks range from defensive commodities to bets on emerging markets. But many of the companies listed here share several superpowers that should help them smooth out the coming year, including business models that generate a lot of recurring revenue, strong balance sheets, and pricing power, which should help Because they can pass rising costs on to customers without seriously affecting their profits. Among these companies, not many tech companies: When interest rates are high, the short-term prospects of technology companies tend to suffer. Still, these companies should provide solid growth and margins as investors take a deep breath, prepare for the new year, and wait for an eventual rebound.
“Stick” service, stable income
If a recession hits in 2023, fund managers believe that businesses with “sticky” products and services, which tend to keep customers loyal, will do well and provide investors with a steady stream of income.
Keith’s favorite for many years is Republic Services, the second largest waste management company in the United States. Given its market share, Keith believes the company is “able to provide a level of defensibility” in tough times. She also notes that the company has “very significant recurring, annuity-style revenue”: In fact, about 80% of the company’s revenue comes from this recurring source: “mission-critical” services to commercial and residential customers. Republic Services has a customer retention rate of nearly 95%, and its contracts (often years long) include automatic inflation-based price adjustment clauses, allowing the company to raise prices when costs rise. Keith also praised the company’s capital allocation strategy and highlighted acquisitions such as its recent purchase of another waste management company, US Ecology. With the stock expected to trade at about 28 times earnings over the next 12 months, the stock isn’t necessarily cheap. But analysts expect Republic Services to post earnings growth of more than 10% in 2023, which is pretty good growth in a slowing growth environment. Keith noted that the company should be more resilient in a short-term downturn because many of its contracts have longer terms that cannot be amended.
Otis Worldwide, a manufacturer of elevator equipment, “isn’t in a very glamorous business,” but in Keith’s view, “it’s a A very good company.” Otis International Group is a global leader in the elevator industry with 2021 revenue of more than $14 billion. Its business is divided into sales of new equipment and service and upgrade of existing elevators. Keith noted that there are a lot of aging elevator systems in commercial buildings that need to be replaced, so “we’ve got a pretty good replacement cycle ahead of us.” Service and maintenance, meanwhile, provide Otis International with recurring revenue, making its earnings more predictable. While the company has been hurt by commodity costs and a stronger dollar, Keith is confident the company can deliver solid earnings growth. Otis International, which pays a dividend yield of nearly 1.5%, has repurchased $700 million worth of stock so far this year. While Otis International’s revenue isn’t expected to grow significantly in 2023, Wall Street expects Otis International to post a massive 12% increase in earnings per share next year. The company’s stock trades at about 24 times forward earnings, and Keith thinks investors can ride on this “very wide moat,” so hopefully.
The pursuit of stability does not require sacrificing growth. Thornstein of Jensen Investments still thinks Microsoft (MSFT) can satisfy investors on both counts. Microsoft also makes our list of stocks to buy for 2022. “Because it’s business-centric, it’s not so much revenue growth for them as business customers continuing to need their services,” Thornstein noted. Unless there’s a business problem at scale, Microsoft’s services will still have considerable value. Strong demand.” That includes the tech giant’s business office and productivity software, as well as its powerful cloud computing arm; these services, he notes, “are actually making companies more efficient and can help companies during a recession.” big company”. Microsoft’s 2022 fiscal year ended in June with revenue of just under $200 billion. Analysts expect Microsoft’s revenue to grow about 7% in the fiscal year ending June 2023 and 14% in the following fiscal year. That’s lower than the company’s average growth rate of around 15% over the past five years, but it’s still a decent growth rate amid the economic downturn. Microsoft trades at about 25 times forward earnings, and is nowhere near as expensive as some of its growth tech peers.
Sysco also falls into the “recession-resistant category,” according to Parnassus’ Keith. Sysco is the world’s largest food distributor, serving restaurants, hotels, and hospitals, among others. Keith noted that the company benefits from having a “very substantial market share” in the U.S., accounting for about 17 percent of the segment. Industry leadership benefits the company in many ways: “Sysco has invested in technology and people, and has the ability to serve customers efficiently.” market share. She also pointed to the company’s ability to weather recessions in the past, noting that it also survived the 2008 financial crisis: “There’s a good case to be made that the company can weather another downturn.” While a recession typically prompts consumers to spend less at restaurants, Keith noted that if there is a recession in 2023, consumers may continue to eat out due to changing demographics and spending habits. If inflation does start to cool significantly next year, Sysco will also benefit from lower fuel and other expenses. Analysts expect the company to post a massive 53% increase in earnings per share in the fiscal year ending June 2023; the stock trades at 20 times earnings for the next 12 months, which is a reasonable valuation range, and has a 2.3% dividend yield.
Typical Recession-Proof Stocks
In tough economic times, returning to your familiar territory can be comforting and prudent. That’s what some fund managers recommend, recommending stocks in sectors that do well in recessionary and slowing environments.
Eric Thornstein’s longtime favorite is discount retail giant TJX, whose stores include TJ Maxx and Marshalls. TJX falls into the category of what Thornstein calls “treasure hunt” stores, where budget-conscious shoppers look for bargains. “In a recession, consumers are more inclined to buy cheap,” he noted. If 2023 is as sluggish as some CEOs fear, that should be a good thing for TJX. The company buys some unsalable inventory from full-price department stores. Thornstein believes that if there is a recession, TJX should be able to get more excess inventory to sell at a discount. Morningstar analyst Zain Akbari echoed the sentiment, writing in a recent note: “With consumers looking for value amid an uncertain economic outlook, we see TJX in Well positioned.” Wall Street expects TJX’s earnings per share to grow about 11% next year and nearly double by 2024. The stock trades at 23 times forward earnings and pays a 1.5% dividend.
For investors worried about a possible recession in 2023, Thornstein recommends tried-and-true Procter & Gamble, which he says is “a typical consumer staple that should sell fairly well during a recession.” He noted that the consumer goods giant’s focus is on “personal care, beauty, home care, fabric care and baby care.” “Consumer demand for these products is uninterrupted.” Thornstein said there were still some low-priced brands in P&G’s lineup, even as a sluggish economy and high inflation prompted consumers to seek out cheaper brands on store shelves. brand.
Procter & Gamble, the largest company in the S&P 500 (with a market capitalization well over $300 billion), has been hit by a market-wide sell-off; its shares are down more than 13% this year, as has the benchmark index. But Thornstein said the company still “demonstrates strong, resilient, organic revenue growth”; in his view, this is a big tailwind that offsets the hit to P&G’s business from currency issues, as the U.S. dollar relative to Other currencies around the world appreciated sharply. Procter & Gamble’s profit and revenue growth are expected to slow next year, but Thornstein emphasized that P&G’s 2.5% dividend yield strengthens its appeal to investors. If the company achieves the expected growth, “the company will have a better chance of standing out in investors’ minds as everything else slows down,” he said.
James Tierney, chief investment officer for U.S.-focused growth at AllianceBernstein, is bullish on Zoetis, which makes drugs and vaccines for pets and livestock. “Animal health-related products are always the ones you need to buy, whether the economy is in a recession or not,” Tierney noted. The stock has encountered some headwinds, including currency issues because a sizable portion of its business is outside the U.S.; supply constraints; and a shortage of veterinarians working in clinics. Those factors prompted Zoetis to cut its sales forecast for this year, sending its shares down nearly 40% in 2022. But Tierney said the company’s balance sheet was “rock solid” and believed issues such as a shortage of veterinarians would improve over the next year. Zoetis CEO Kristin Peck said on a recent earnings call that she is optimistic that the company, with its drug pipeline, market dominance and financial strength, will “continue to lead” in the animal health market. Zoetis expects to generate nearly $8 billion in revenue this year, and analysts expect profit growth of more than 8% in 2023, while revenue growth exceeds 6%.
Recession or not, if your car needs fixing, you’re going to get it fixed. That’s why Keith of Parnassus Investments likes auto parts retailer O’Reilly Automotive. Keith noted that in tough economic times, “drivers stick with their old cars and do more repairs instead of buying new,” a trend that should benefit O’Reilly Automotive. She applauded the company’s strong cash flow and balance sheet, saying it typically does well in recessions. Wall Street analysts raised their price targets for O’Reilly Automotive amid strong third-quarter earnings. In its third-quarter earnings report, the company beat expectations and raised its full-year earnings forecast. Wall Street estimates that the company’s earnings per share will grow by more than 12% next year, much faster than their 6% forecast for the company in 2022. Meanwhile, O’Reilly Automotive stock trades at about 23 times expected earnings for the next year.
bet on emerging markets
Investors may be surprised to learn that some emerging markets will be “pretty resilient” in 2023, particularly India and Brazil, which are struggling to move into next year, said Ramiz Cherat of Rivantumbo. China’s economy may outperform markets such as the U.S., while still having room to cut interest rates. Over the next year, in these and other countries, factors such as these could make growth in some areas of emerging markets look more attractive than growth in developed markets, Cherratt said.
For these reasons, Cherat favors Heineken, the world-renowned brewer based in the Netherlands. The company has a deep presence in Brazil and Southeast Asia, and “will see revenue growth” as the reopening of those regions accelerates in the post-pandemic world, Cherat said. Structurally, those markets “should be better than the U.S.” in 2023 and beyond, he argued. Cherart noted that despite the company’s weaker earnings in its most recent quarter, Heineken has maintained strong pricing power while delivering high single-digit organic volume growth. Analysts estimate Heineken’s revenue growth of about 8% and earnings per share growth of about 7% in the next calendar year. By 2023, the stock’s expected price-to-earnings ratio is expected to reach 17 times (currently about 14 times), which belongs to the reasonable valuation range.
Cherat is particularly bullish on India following the country’s systemic reforms to tax and bankruptcy laws. India’s GDP growth is estimated to be around 5% next year, slower than in 2022 but likely to outpace the U.S. and many other countries. According to Cherat, India is a market that is expected to grow in terms of mortgage lending and consumer credit. This belief is reflected in his enthusiasm for HDFC Bank, a long-time stake held by Rui Wantong Bo, who he said is still “taking market share in its core areas, especially mortgages.” “. This business is expected to grow even stronger as the company completes its merger with one of India’s leading housing finance companies. Cherat said the merger would allow it to “sell mortgages through a wider branch network and take advantage of HDFC Bank’s deposit strength.” Revenue growth of 21% (with analysts expecting revenue of more than $14 billion for the current fiscal year ending in March next year), while earnings per share could rise about 17% over the same period. At about 19 times forward 12-month earnings, HDFC Bank stock is one of the cheapest stocks on Fortune’s list and could be a good buy for investors willing to bet on emerging markets. entry point.
For those confident about consumer demand in Southeast Asia, Dave Chakrabarti, co-CIO of Global Focused Growth at AllianceBernstein, recommends Philippines-based Universal Robina. It’s a consumer staples company that makes snacks, cup noodles and beverages, and exports its products to countries like Indonesia and Vietnam; in 2021, it had $2.4 billion in revenue. According to Chakrabarty, the benefits of moving manufacturing out of China are being highlighted in Southeast Asian markets; he expects a combination of a growing youth population and rising incomes to be “the main drivers of demand for branded consumer goods”. That should all benefit Universal Robina, Chakrabarty said, as the company took advantage of supply chain disruptions during the COVID-19 pandemic to reduce costs, enabling the company to profit from the reopening of Asia in the post-epidemic era. The company recently reported strong sales growth in the third quarter, even as rising costs weighed on its margins, and Chakrabarty expects the company to offset inflation with price increases. Analysts expect Universal Robina’s earnings to shrink this year, but they expect the company’s 2023 earnings to grow by more than 15%, while revenue growth will be around 7%. At the same time, the stock’s price is also at an all-time low: it’s trading 30% below its five-year high and below its average price-to-earnings ratio for the same period. Analysts at JP Morgan see the stock as an “undervalued quality food stock.” That could offer investors a relatively cheap way to bet on consumers in Southeast Asia.
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Experts recommend
Republic Services (ticker: RSG, $134)
Otis International Group (ticker: OTIS, $78)
Microsoft Corporation (ticker: MSFT, $241)
Sysco Corporation (ticker: SYY, $85)
TJX (ticker: TJX, $78)
Procter & Gamble (ticker: PG, $143)
Zoetis Corporation (ticker: ZTS, $146)
O’Reilly Automotive (ticker: ORLY, $838)
Heineken Beer (ticker: OTC:HEINY, $45)
HDFC Bank (ticker: HDB, $68)
Universal Robina Corporation (ticker: PSE:URC, $2)
Share price as of November 18, 2022.
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How Fortune is doing
To quote a colleague: Whoops. We believe our 2022 picks for “more stable yield stocks” are inflation-proof. But home prices and interest rates have risen far faster than we expected, and the median decline in our stock picks over the past 12 months has been 41%. Here’s how it happened. —Matt Heimer
Weak Big Tech Companies
The tech giants are far from being on the verge of extinction. But their growth in the age of COVID-19 lockdowns working from home and shopping from home isn’t sustainable — and so did our picks for Microsoft, Amazon and Salesforce at their year-ago valuations . They lost 29%, 49% and 51% respectively.
Chip companies take a hit
Few companies have achieved as much industry dominance as chipmaker Taiwan Semiconductor Manufacturing Co., whose shares have nearly quadrupled in the five years through January 2022. Geopolitical tensions and recession fears have dimmed it this year; its shareholders have lost 32% over the past year, compared with a 14% loss for the S&P 500 .
stable growth stocks
The only outperformers in our portfolio are consumer staples, which typically do well when recession fears loom. Those stocks include Nestlé , Johnson & Johnson , and potato chip maker PepsiCo , owner of Frito-Lay . Pepsi is our top pick, with a total return of 14%. (Fortune Chinese website)
A version of this article appears in the December 2022/January 2023 issue of Fortune with the headline “11 stocks to stick with for 2023: Bullish prospects in bearish times). Portions of this article were previously published online on Fortune.com on October 13, 2022 under the title “Where to invest now: The 8 best stocks to buy in 2023” buy for 2023).
Translator: Zhong Huiyan-Wang Fang
If the investment theme for 2021 was the post-COVID rebound, and the theme for 2022 was bracing for inflation, think of 2023 as the year investors should buckle up for a downturn. “Certainly the odds have increased that we’re heading into a recession,” says Ramiz Chelat, a portfolio manager for Vontobel’s Quality Growth Boutique. In fact, a whopping 98% of CEOs polled in a recent survey by the Conference Board said they were preparing for a recession in the US in the next year.
The engine driving those recession fears, ultimately, is inflation—which in turn has launched the Federal Reserve on a campaign of interest rate hikes that has threatened corporate profits and helped drive the stock markets into bear territory over the past year. There are glimmers of hope that inflation may finally be peaking, but the watchword for 2023 remains caution.
Still, where regular investors may just see pain, investing pros see opportunity. Investing in 2023 is “really about quality,” says Lori Keith, director of research and portfolio manager at Parnassus Investments—in other words, owning companies “that not only can weather a deeper, more prolonged regression, should we see that, but also [are] able to participate when we do finally see a reversal” of the Fed’s rising-rate strategy.
Spotting those quality stocks may involve a change in mindset, for amateurs and pros alike. Eric Schoenstein, a managing director and portfolio manager at Jensen Investment Management, says he’s been tweaking his thinking when evaluating stocks, focusing more margin on reprofit. With war in Ukraine and persistently high inflation, and likely more rate hikes ahead, “I don’t think this is an environment where top-line growth is as easy to achieve, [and] that’s going to be with us for a period of time,” he says.
With that backdrop in mind, Fortune asked five top portfolio managers for their best stock picks for 2023. The stocks run the gamut from defensive staples to bets on emerging markets. But many of the companies listed here have a few superpowers in common that should help them navigate the coming year, including business models that generate lots of recurring revenue; strong balance sheets; and pricing power that should help them pass rising costs through to customers without severely denting their profits. You won’t find as many tech companies in the bunch: Their near-term prospects tend to suffer when interest rates are high. Still, the companies here should provide stable growth and profit margins as investors prepare for—deep breath—a new year, and wait for an eventual rebound.
“Sticky” services, steady earnings
If a recession is in the cards for 2023, money managers believe that businesses with “sticky” products and services—offerings that tend to generate and retain customer loyalty—will deliver steady revenue streams and perform well for investors.
A favorite of Keith’s for years, Republic Services is the second-largest waste management company in the US Keith argues that in rough times it “provides that degree of defensiveness,” given its market share. She also notes that the company has a “very significant amount of recurring, annuity-type revenue”: In fact, about 80% of its revenue comes from such recurring sources, through services that are “mission critical” to commercial and residential customers alike. Republic has a nearly 95% customer retention rate , and its contracts—which often span multiple years—include inflation escalators that allow the company to increase prices as it deals with higher costs. Keith also applauds the company’s capital-allocation strategy and highlights acquisitions, like cother its recent purchase of US ano waste management firm. Trading at around 28 times its estimated earnings for the next 12 months, the stock isn’t necessarily cheap. But analysts project that Republic can grow earnings by over 10% in 2023—a decent clip in a slower growth environment. And the company should be more insulated in a short-term recession, Keith notes, since many of its contracts are of longer duration and can’t be modified.
Otis Worldwide is an elevator equipment manufacturer that, though not in “exactly a super glamorous industry,” is what Keith considers a “very good business in terms of being able to generate consistent profits and cash flow.” Otis is the leading firm in the elevator industry worldwide, with over $14 billion in revenue in 2021, and its business is split between new equipment sales and servicing and upgrades of existing elevators. There are a lot of aging elevator systems that need to be replaced in commercial buildings, Keith so there’s a “nice replacement cycle in front of us.” Service and maintenance, meanwhile, provide recurring revenue for Otis and make its earnings more predictable. While the company has been hurt by commodity costs and unfavorable exchange rates driven by the strong dollar, Keith believes it can keep steadily growing earnings. Otis also doles out a nearly 1.5% dividend yield, and year to date has repurchased $700 million worth in shares. Although revenues Aren’t expected to go gangbusters in 2023, the Street expects Otis to increase earnings per share by a hefty 12% next year. Its shares trade at around 24 times estimated forward earnings, and Keith believes investors can take a ride—hopefully, upward —on this “very wide-moat business.”
Seeking steadiness doesn’t require sacrificing growth. Jensen’s Schoenstein still believes Microsoft, which was also featured on our stocks to buy for 2022 list, could provide investors with both. as it is about their business customers continuing to need their services,” Schoenstein points out. “Unless you have large-scale business failures, Microsoft’s services are still going to be in pretty strong demand.” That includes the tech titan’s enterprise office and productivity software as well as its powerhouse cloud unit; those offerings “are actually allowing companies to be more efficient, which helps them in recessionary times,” he notes. Microsoft ended its 2022 fiscal year in June with just shy of $200 billion in revenue, and analysts project it can grow revenues by about 7% in the fiscal year ending June 2023, and 14% the following fiscal year. That would be below the company’s average of aroun d 15% or so in the past five years, but it still represents a decent pace, given the lackluster economic backdrop. With its shares trading at about 25 times forward earnings, Microsoft also doesn’t come nearly as expensive as some of its growth tech peers.
Parnassus’s Keith believes that Sysco also fits into the “recession-proof bucket.” Sysco is the world’s largest food distributor, servicing the likes of restaurants, hotels, and hospitals. Keith notes that the company has benefited from having “very significant” market share in the US, at about 17% of the fragmented field. That leadership position helps the company on many fronts: “Sysco is investing in their business in terms of technology, in terms of their employees, [and] having the ability to service customers more efficiently,” Keith says, which should help them gain even more market share. She also points to the firm’s track record for surviving downturns well, noting that it navigated the 2008 financial crisis deftly: “There’s a really strong company case here that the can weather additional downturns.” Although recessions often prompt consumers to spend less money at restaurants, Keith notes that owing to changes in demographics and spending habits, consumers will likely conti nue eating out if the economy slumps in 2023. And if inflation does begin to meaningfully cool next year, that should also help Sysco by lowering its costs for fuel and other expenses. Analysts expect the company to post a whopping 53% earnings per share growth in the fiscal year ending June 2023; the stock trades at a reasonable 20 times the next 12 months’ earnings, with a 2.3% dividend yield.
Classic recession stocks
In difficult times, it can be comforting—and prudent—to return to what you know. And some money managers suggest doing just that, recommending stocks in industries that historically hold up well in recessions and lower-growth environments.
TJX, the off-price retailing giant whose stores include TJ Maxx and Marshalls, is a longtime favorite of Eric Schoenstein’s. TJX falls into the category of what Schoenstein calls “treasure hunt” stores, where budget-conscious customers search for deals. He points out that there’s a “good track record of strong consumer trade-down spending in recessionary periods,” which should be a boon for TJX if 2023 is as glum as some CEOs fear. The company buys some of its inventory from full-price department stores that can’t sell it—and Schoenstein believes that if there is a recession, TJX should be able to get more of that discounted overstock. Morningstar analyst Zain Akbari is of the same mind, writing in a recent note that “with consumers increasingly looking for value amid an unsettled economic landscape, we believe TJX is well positioned.” The Street expects TJX to increase earnings per share by about 11% next year and to almost double that in 2024. The stock trades at 23 times forward ear nings and comes with a 1.5% dividend yield.
For investors who are really wringing their hands about the possibility of a 2023 recession, Schoenstein recommends tried-and-true Procter & Gamble, what he considers “your classic consumer staple that ought to be pretty good during a recession.” The consumer goods titan’s business focuses on “personal care, grooming, home care, fabric care, baby care,” he notes. “People don’t stop spending on those things.” And even if tougher times and sticky inflation prompt consumers to look for the cheaper brand On the shelf, Schoenstein says, P&G has some lower-price brands within its family of products.
As a large holding in the S&P 500 (it has a market cap of well over $300 billion), P&G has been hit by the overall selloff in the market; its share price has declined over 13% so far this year, as has the benchmark index. But Schoenstein says the company is still “showing strong, resilient, organic revenue growth”; from his perspective, that’s an upside that offsets hits to P&G’s business that have been driven by currency issues, with the US dollar having soared compared with other global currencies. Both earnings and revenue growth are expected to be muted next year, but Schoenstein highlights P&G’s 2.5% dividend yield as something that strengthens its case for investors. If the company posts the anticipated growth, he says, it will have a opportunity to stand out in investors’ minds as everything else slows.”
James Tierney, chief investment officer of concentrated US growth at AllianceBernstein, favors Zoetis, which makes medicines and vaccines for pets and livestock. “Animal health is going to be something that you need year in, year out, whether you have a recession or not ,” Tierney notes. The stock has encountered some headwinds, including exchange rate issues, since a sizable portion of its business is outside the US; supply constraints; and a shortage of veterinarians working in clinics. These factors have prompted Zoetis to lower guidance sales for the year, and its stock is down nearly 40% in 2022. But Tierney says the company’s balance sheet is “ironclad,” and believes that issues like vet supply will correct themselves next year. CEO Kristin Peck said on Zoetis’s recent earnings call that she’s optimistic the firm has the drug pipeline, market dominance, and financial fortitude to “continue outpacing” growth in the animal health market. Zoetis is expected to bring in nearly $8 bill ion in revenue this year, and analysts estimate the company can grow earnings by over 8% in 2023, while revenues could grow more than 6%.
Recession or not, if your car needs to be fixed, you’re going to fix it. That’s why Parnassus’s Keith likes O’Reilly Automotive, the auto-parts retailer. In tougher economic times, Keith notes, “drivers hold on to their cars for longer [and] look to do more repairs versus purchasing new cars,” a trend that should benefit O’Reilly. She applauds the company’s strong cash flow generation and sturdy balance sheet, and says it has typically performed well in recessions. On the back of a strong third-quarter earnings report, during which the company beat estimates and raised earnings guidance for the full year, analysts across Wall Street upped their price target for O’Reilly. And the Street estimates the company can grow earnings per share by over 12% next year, a hearty clip faster than the 6% they expect for 2022. O’Reilly’s stock, meanwhile, is expected to trade around 23 times forward earnings in the coming year.
Emerging-market bets
Ramiz Chelat of Vontobel says investors may be surprised to find that some emerging markets will be “quite resilient” in 2023—in particular India and Brazil, whose economies could outperform markets like the US heading into next year while at the same time having room to cut interest rates. Factors like these, in those and other countries, could make emerging-market growth look more appealing than developed-market growth in certain areas next year, Chelat argues.
For those reasons among others, Chelat likes Heineken, the globally known brewer based in the Netherlands. Chelat says the company has a strong presence in Brazil and Southeast Asia, “which are seeing improving growth” as they accelerate their post-COVID pandemic reopening. He believes those markets structurally “should be in better shape in 2023 and beyond” than the US Chelat notes that despite weaker earnings in the most recent quarter, Heineken has maintained strong pricing power, while generating organic volume growth in the upper single digits. Analysts estimate that Heineken can grow revenue in the 8% range and earnings per share by about 7% for the next calendar year. In 2023, the stock is expected to trade at a reasonable 17 times forward earnings (it’s currently trading at around 14).
Chelat is particularly bullish on India in the wake of systemic reforms of the country’s tax and bankruptcy laws. India’s GDP is estimated to grow at around 5% next year, a rate which, while slower than in 2022, will likely outpace that of the US and many other countries. Chelat argues that India is a market that’s poised for growth in mortgages and consumer credit. That belief is reflected in his enthusiasm for HDFC Bank, a longtime holding of Vontobel’s, which he says is still “taking market share in its core segments, in mortgages in particular.” That business is only expected to get stronger as the company completes its merger with one of India’s leading housing finance firms. Chelat says the combined network will be able “to sell mortgages across a much wider branch network and leverage HDFC Bank’s deposit strength.” Analysts are optimistic, predicting nearly 21% revenue growth for the fiscal year ending in March 2024 (for the current fiscal year, ending next March, analysts estimate it will bring in over $14 billion in revenue), while earnings per share could grow roughly 17% in the same time frame. Trading at around 19 times the next 12 months’ estimated earnings, HDFC’s stock is among the cheaper picks on Fortune’s list—a potentially nice entry point for investors willing to bet on emerging markets.
For those who have faith in consumer demand in Southeast Asia, AllianceBernstein’s co-CIO of concentrated global growth Dev Chakrabarti recommends Philippines-based Universal Robina. It’s a consumer staples company that makes snacks, cup noodles, and beverages, exporting its wares to countries like Indonesia and Vietnam; it brought in $2.4 billion in revenue in 2021. Chakrabarti believes that Southeast Asian markets are seeing the benefit of manufacturing moving outside of China; he expects that a growing youth demographic and rising incomes will combine to “be a key driver of demand for branded consumer goods.” That should all benefit Universal Robina, which Chakrabarti says has taken advantage of the pandemic’s disruptions to improve its costs, poising the company to profit from Asia’s post-COVID reopening. Though higher costs have put pressure on the company’s margins, it recently reported strong sales growth in its third quarter, and Chakrabarti expects it will be able to push through price increases to offset inflation. Analysts expect Universal Robina’s earnings to shrink this year, but they estimate the company can deliver over 15% earnings growth in 2023 while growing revenues at around 7%. The stock, meanwhile, comes historically cheap: It’s trading 30% below its five-year high as well as below its average price-to-earnings ratio for that period. JP Morgan analysts consider the stock an “underappreciated high-quality staples name.” That could offer investors an inexpensive way to bet on the Southeast Asian consumer.
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Picks from the experts
Republic Services (RSG, $134)
Otis Worldwide (OTIS, $78)
Microsoft (MSFT, $241)
Sysco (SYY, $85)
TJX (TJX, $78)
Procter & Gamble (PG, $143)
Zoetis (ZTS, $146)
O’Reilly Automotive (ORLY, $838)
Heineken (OTC:HEINY, $45)
HDFC Bank (HDB, $68)
Universal Robina (PSE:URC, $2)
Prices as of 11/18/22
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How Fortune did
To quote a colleague: Oof. We believed our “Stocks for Smoother Sailing” for 2022 would withstand inflation. But prices and interest rates rose far faster than we expected, and our picks lost a median of 41% over the past 12 months. Here’s how it went down.—Matt Heimer
Big Tech, tamed
Tech giants are hardly teetering on the verge of extinction. But the growth they saw in the COVID work-and-shop-from-home lockdown era wasn’t sustainable—nor, it turns out, were the share valuations that our picks Microsoft, Amazon, and Salesforce were commanding a year ago. They racked up losses of 29%, 49%, and 51%, respectively.
Chip shot
Few companies dominate their industry like chipmaker Taiwan Semiconductor Manufacturing Co., and in the five years through January 2022, its stock nearly quintupled. This year, the combination of geopolitical tensions and recession fears dimmed its luster; its shareholders lost 32% over the past year, while the S&P 500 lost just 14%.
Comfort stocks
Our portfolio’s only outperformers were consumer staples stocks, which often do well when recession fears loom. Those included Nestlé, Johnson & Johnson, and—speaking of chipmakers—PepsiCo, owner of Frito-Lay. Pepsi was our best pick, with a 14% total return.
A version of this article appears in the December 2022/January 2023 issue of Fortune with the headline, “11 stocks to stick with for 2023: Bullish prospects in bearish times.” Parts of this article were previously published online on Oct. 13, 2022, under the title, “Where to invest now: The 8 best stocks to buy for 2023.”
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