The stock market is ending the year with a flourish—and so are Barron’s favorite picks for 2023.
Every December for the past 14 years, Barron’s has selected 10 stocks that are good bets to outperform the market over the next 12 months.
The 2023 group—which included
Delta Air Lines
and
Comcast,
among others—topped the market, returning 31% on average including reinvested dividends, against 24.5% for the
S&P 500.
The 2022 group beat the index by 10 percentage points, while we were slightly behind the market in 2021.
To beat the market this year, you probably needed to have some exposure to the Magnificent Seven—
Apple,
Microsoft,
Amazon.com,
Alphabet,
Tesla,
Nvidia,
and
Meta Platforms.
And we did. We included Amazon.com and Alphabet, which were trading cheaply a year ago, and they powered our list for 2023. But our picks, as is typical, had a value bias. The biggest winner was home builder
Toll Brothers,
which more than doubled, helping to offset our big loser, the aluminum miner
Alcoa,
which returned negative 29%.
Our list for 2024 includes a diversified mix of familiar stocks and some surprises, once again leaning toward, but not exclusively to, the value camp:
Alibaba Group Holding,
Alphabet,
Barrick Gold,
Berkshire Hathaway,
BioNTech,
Chevron,
Hertz Global Holdings,
Madison Square Garden Sports,
PepsiCo,
and
U-Haul Holding.
Here are the stocks—and why we favor them—in alphabetical order:
Alibaba Group Holding
Alibaba is one of the cheapest tech-oriented companies in the world—by a long shot.
After dropping 18% in 2023, Alibaba’s U.S.-listed shares trade for just eight times projected earnings in its current fiscal year ending in March. With that decline, the stock, at a recent $72, is back where it stood following its 2014 initial public offering, despite a tenfold rise in revenue and a fivefold increase in earnings. Its market cap is less than 15% of its closest American peer, Amazon.com.
The company sits on a small mountain of cash, equal to a third of its current market value of $184 billion. Adding in its core Chinese e-commerce unit, its cloud computing and logistics businesses, and a stake in Ant Financial, the sum of the company’s parts comes to about $130 a share, nearly double the current stock price, according to analysts at China Merchants Securities in Hong Kong
Alibaba isn’t risk-free. It delayed plans for an IPO of the cloud software business due to U.S. chip export restrictions, and faces growing competitive pressures in China. But headwinds from the Chinese government’s crackdown on big tech and a sluggish domestic economy are reflected in the stock, says Steve Galbraith, managing partner of Kindred Capital Advisors.
“At this price, things don’t need to go spectacularly well—or even well—for Alibaba,” he says. “They just need not to get incrementally worse.”
A bigger dividend, now 1%, or larger stock buyback could boost the stock.
Alphabet
Alphabet could be the best bet among the Magnificent Seven stocks that led the market higher in 2023.
It’s expected to grow as fast as Microsoft, with earnings forecast to be up 15% in 2024, three times as quickly as Apple’s 5% growth. Yet its stock trades for just 20 times earnings, a discount to both Microsoft and Apple’s 30 times, despite gaining 50% this year.
Investors have been worried about slowing growth in Alphabet’s cloud computing division, the threat that artificial intelligence poses to its search business, and antitrust scrutiny. Those issues look manageable.
The “disappointing” cloud business still grew third-quarter revenue at a 22% clip, and while the company was caught off guard by Microsoft’s AI search initiative, it quickly regrouped. As for antitrust issues, they may not go anywhere, and Alphabet might be worth more broken up, anyway.
Alphabet has over $100 billion of net cash as of Sept. 30, and the company is showing some discipline on costs. That leaves plenty of money to buy back stock, and perhaps even start paying a dividend. Alphabet could easily support a 1.5% payout, in line with the market.
“We continue to view Alphabet as one of the true leading tech franchises at a fundamental inflection point,” writes Evercore ISI analyst Mark Mahaney.
Barrick Gold
Gold-mining stocks haven’t been able to keep up with gold prices—but this may be the year that changes for Barrick Gold.
Gold miners are thought of as leveraged plays on the metal, yet Barrick shares are up just 3% this year while gold is up more than 10% to $2,036 an ounce. Blame higher costs and lower-than-expected gold production.
Barrick has several things going for it. The company has some of the world’s best mines in spots like Nevada and the Dominican Republic, and it’s the top gold producer in Africa. It aims to boost its mine output—mostly gold and some copper—by 30% by the end of the decade.
It has the industry’s most effective leader in CEO Mark Bristow, a swashbuckling South African and hands-on manager who visits each major mine at least three times a year. He also has a knack for handling delicate relations with host countries in the developing world.
“Barrick probably has the best management in the mining business, an excellent balance sheet with virtually no net debt, and a well-covered 2.3% dividend yield,” says independent analyst Keith Trauner. The stock trades for about 16 times next year’s projected earnings.
Berkshire Hathaway
The recent death of Berkshire Vice Chairman Charlie Munger at 99 highlights the key-man risk at Berkshire, with the incomparable Warren Buffett now 93. Buffett is impossible to replace but he has positioned Berkshire to succeed without him, and the stock should do just fine with him still at the helm in 2024.
The case for Berkshire starts with what CEO Buffett calls a “Fort Knox” balance sheet, with over $150 billion in cash, or about 20% of the company’s market value. Earnings are growing too, with Berkshire’s after-tax operating profits up nearly 20% so far in 2023. They could hit $40 billion this year, powered by higher interest income on Berkshire’s cash and strong insurance underwriting results, helped by a turnaround at Geico. Berkshire’s equity portfolio, led by Apple, is having a great year.
The stock looks reasonably priced, valued at 1.4 times estimated year-end 2023 book value and about 18 times next year’s projected earnings. The Class B shares, at $356, trade at a 2% discount to the Class A stock and look like the better bet.
“Berkshire shares are attractive in an uncertain macro environment,” wrote UBS analyst Brian Meredith in a recent note. He puts intrinsic value at about $600,000 per Class A share and carries a price target of $620,000, versus a recent $545,000.
BioNTech
BioNTech, like all Covid-19 vaccine makers, has gotten crunched in 2023. But it has so much cash that it would have appealed to Warren Buffett’s mentor, famed value manager Benjamin Graham.
Covid vaccine plays, including BioNTech, its partner
Pfizer,
and competitor
Moderna,
have slumped amid growing doubts about demand for the jabs. Those concerns were confirmed this past week after Pfizer cut its guidance for Covid-related sales. BioNTech stock is now trading around $104, down from a peak of $447 in 2021.
The bear case is that profits from Covid vaccines, BioNTech’s only commercial product, will flag in 2024 and that the company’s drug pipeline is unexciting. Citing these factors,
J.P. Morgan
recently cut its rating on the stock to Underweight.
But unlike so many cash-burning biotechs, BioNTech is expected to remain profitable in 2024, and the company’s oncology-focused pipeline could prove more promising than some investors believe. BioNTech has also said it won’t blow the cash on an expensive deal.
And BioNTech has oodles of cash, more than $18 billion. That’s nearly three-quarters of its current market value of $25 billion. Investors effectively are paying just $7 billion for its Covid franchise and drug pipeline.
Graham would call that a margin of safety. We call that a stock worth owning.
Chevron
Some of the sheen came off Chevron in 2023 but the company remains one of the best-run big energy companies in the world.
The stock, at around $150, is off 16.5% in 2023—worse than any of Chevron’s global supermajor peers, including
Exxon Mobil,
which is down 8%.
Chevron’s underperformance was deserved. Two of Chevron’s biggest oil fields in the Permian basin and in Kazakhstan had production shortfalls, and investors were unimpressed with Chevron’s $60 billion deal to buy
Hess,
a steep price for a company whose chief asset is a 30% stake in the huge offshore field in Guyana.
Still, the shares look inexpensive, despite the possibility that 2024 earnings estimates come up short of expectations due to recent weakness in oil and gas prices. Chevron trades at 10.7 times projected 2024 earnings and yields 4.2%, based on the company’s plan to boost its dividend by 8% in January. After the Hess deal closes, the company also plans to buy back $20 billion of stock annually, or about 6% of its shares.
Greg Buckley, an analyst at
Adams Funds,
says Chevron has a lower-risk growth profile than peers, trades at a 15% discount to its average cash-flow multiple, and should have a total yield—dividends plus buybacks—of about 12% after the Hess deal closes. “The valuation is compelling,” he says.
Hertz Global Holdings
Hertz’s high-profile move into electric vehicles has proven a bust, but the stock looks cheap enough to be a winner in 2024.
Barron’s had a favorable call on Hertz when the stock traded close to $18 earlier this year, but shares have dropped almost 50%, to around $10. To put it simply, Hertz’s big bet on EVs—about 11% of its fleet against an estimated 2% for rival
Avis Budget Group
—went bad. Repair costs for its Tesla-heavy fleet are high, and Hertz is getting less than it had projected when the cars are sold due to deep price cuts. Customers aren’t keen on the cars either, due to charging and range issues.
The rental-car industry, though, is an oligopoly, with over 90% of the U.S. market controlled by Enterprise, Avis, and Hertz. That means pricing should stay rational. And even with cuts in profit estimates, Hertz trades cheaply at 8.6 projected 2024 earnings, while its market value of $3.1 billion is less than half that of the somewhat larger Avis. There’s also a chance that the investor group that controls Hertz with a nearly 60% stake could offer to buy out public shareholders if the stock remains cheap.
The current stock price is “overwhelmingly attractive for patient investors,” wrote Chris Woronka, a Deutsche Bank analyst.
Madison Square Garden Sports
MSG Sports owns two of the most valuable professional teams in their sports: the New York Knicks and Rangers.
According to Sportico estimates, the Knicks and Rangers are worth $7.4 billion and $2.45 billion, respectively. But the company’s current market value of just $4.2 billion, plus some $300 million of net debt, is worth less than half that. The stock, now around $173, is below where it stood five years ago.
That’s too cheap, even factoring in the “Dolan discount,” a reference to the controlling Dolan family. Chairman Jim Dolan told Barron’s in September that the company won’t entertain a full sale of either team and isn’t interested in a partial sale, either.
“The market is assigning a pretty punitive ‘Dolan discount’ to these trophy assets,” says Jonathan Boyar, president of Boyar Research.
He values the stock at more than $300 a share. He says the company should sell a minority stake in the Knicks or Rangers, buy back a lot of stock, or pay a regular dividend. The ultimate payoff would be a sale of the entire company—and there probably isn’t much downside, given the discount to asset value.
Boyar notes that the Dallas Mavericks’ Mark Cuban, who was thought to be an owner for life, recently sold a majority stake in the team to the Adelson family.
MSGS stock is languishing because investors are tired of waiting for the Dolans to do something. The wait could end in 2024.
PepsiCo
The “Ozempic effect” and flagging investor interest in traditional consumer staples have weighed on
PepsiCo
stock this year. But the impact of weight-loss drugs on PepsiCo’s snack-food and beverage franchise will likely be minimal.
Though named for a soft drink, Pepsi has a best-in-class snack-food franchise in Frito-Lay, maker of Doritos, Cheetos, and Lay’s potato chips. Frito-Lay generates more than half the company’s profits, making Pepsi less dependent on sugary soda than
Coca-Cola.
Fears that weight-loss drugs will curb snacking caused PepsiCo stock, at $168, to drop 7% in 2023. A confident Pepsi, though, said in October that it expects to deliver per-share earnings growth at the top of its high-single digit annual target in 2024 after a projected 13% gain this year. And the stock trades for 20.6 times next year’s projected earnings, below its five-year average. It also yields 3% and has raised its dividend for 51 straight years, including a 10% increase this past summer.
As for Ozempic, its use is far from widespread—maybe 1% of the population in 2024.
“Pepsi is the most durable business in our coverage,” wrote Jefferies analyst Kaumil Gajrawala in a recent client note.
It rarely pays to bet against the American eater.
U-Haul Holding
There are few businesses with a stronger competitive position than U-Haul Holding, which dominates the do-it-yourself moving business with its nationwide fleet of trucks.
U-Haul’s rivals—including Penske and Budget—are a fraction of its size. It’s the ultimate network-effect business, given its 23,000 locations around the U.S. and Canada and nearly 200,000 rental trucks. The $12-billion company has steadily built a sizable self-storage business that now ranks third in the industry, and could be worth $8 billion alone based on comparable companies.
Given U-Haul’s market position, the nonvoting stock, which trades under the ticker UHAL.B, looks inexpensive. Even with earnings expected to slip to $4.50 this fiscal year due to reduced moving activity, shares are valued at about 14.1 times earnings at a recent $63, while the long-term outlook looks strong.
There is virtually no Wall Street coverage of U-Haul. It is run like a private company by the Shoen family, which owns about half the company.
“It’s hard to find such a dominant brand and such an extremely well and conservatively run business as U-Haul,” says Kindred Capital’s Galbraith. He says the company would be a great acquisition for Berkshire Hathaway.
Write to Andrew Bary at [email protected]
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