AAPL - 3 Stocks With Strong Tailwinds In 2024

2024-01-08 09:00:00 ET

Summary

• There are many uncertainties about 2024 and the direction the economy is going to go.
• Yet, I see three tailwinds that should in any case help three stocks.
• In three different industries, with no mention of AI, I see three interesting picks I want to share with my readers.

Introduction

A new year has come and many are inevitably looking for stocks whose performance may greatly reward its shareholders. One way to find these stocks is to look for those that will benefit from strong tailwinds this year. While what will happen this year is mostly unknown, there are in fact some macroeconomic trends in action that should help support some industries and - within them - some stocks.

In this article, I will share my list of three stocks whose 2024 tailwinds are clear to me. Two of these companies are already part of my portfolio. The third one is on my watchlist and I have been researching it more and more recently for the reasons I will be sharing.

Let me give a spoiler: my list may be disappointing because it won't have an AI name.

The "2024 Tailwind List"

Here is my list. I will start from the tailwind and then give the stock.

Tailwind #1: the Aim Act

First of all, in 2024 the AIM Act approved by Congress rules a 40% phase-down in virgin HFC production and consumption allowances. What are we talking about? For those unfamiliar with the topic, this is an environmentally friendly law, mandating the reduction of virgin production of harmful refrigerants.

What will be the consequence of the 40% scheduled reduction? HFC and legacy refrigerants will still be needed by the HVACR industry. Since virgin production will be reduced, the need for reclaimed refrigerants is set to grow. And here is where my first stock comes in.

Hudson Technologies

Hudson Technologies ( HDSN ) is a small company with a $600 million market cap. This year is set to be its first big year . It is the U.S. leader in reclamation, holding a double spot in the supply chain. On one side, it directly reclaims used refrigerants thanks to its patents and machines. On the other side, it resells reclaimed refrigerants to end customers. It is a company I believe would find a place in Berkshire's portfolio ( BRK.B ) because it checks all the favorite attributes Warren Buffett looks for moat, margins, cash flows, and balance sheet health.

The company recently paid its outstanding debt and currently has a perfectly healthy and unlevered balance sheet.

The company has one risk: inventory management linked to refrigerant gas price volatility. But with supply becoming lower, prices seem to hold and should actually increase.

Hudson trades at a 10 fwd PE, considering an EPS estimate of $1.31. So far, Hudson has been able to overdeliver and generate excess cash every quarter. Moreover, it has been able to keep its gross margins well above its 35% target.

Considering no competitor has the facilities and the size of Hudson in the U.S., this year Hudson is set to meet ever-growing demand for its reclaimed refrigerants and should post 3 very strong quarters in the first nine months of the year. My target price is around $20, making the company's stock price still very interesting today.

Tailwind #2: manufacturing reshoring

The Biden administration has approved big funding for an industrial strategy aiming at revitalizing domestic manufacturing. Together with strong infrastructure spending, the CHIPS and Science Act of 2022 was one of the last steps in this direction. In addition, many North American companies are building new factories either in the U.S. or nearby Mexico , de-risking their activities away from China.

Now, to reshore and revitalize manufacturing activities takes time. So, here we are at the beginning of a long cycle that seems to be quite strategic for the Western world altogether.

Of course, there are tons of companies that will benefit from this huge spending. Machinery manufacturers such as Caterpillar ( CAT ) or Terex ( TEX ) could be good picks.

But I think there is one pick that can benefit from the overall trend, not only during the reconstruction phase, but also from when the investments will have ended creating a stronger manufacturing environment. Here we are with my second pick.

Canadian National Railway

I am investing in Canadian National Railway ( CNI ) and recently added to my position, making it one of my top 5 holdings. I think this pick may surprise some.

Here are my reasons in favor of this Class 1 railroad. First of all, its network extends from Canada all the way down the Gulf Coast and it has access to the three American coasts. It doesn't directly reach Mexico but it is linked to Mexican railways. Its tracks follow the Mississippi River connecting New Orleans to Chicago. From there, Canadian National's network goes both east and west to connect the two oceans.

Why am I bullish on Canadian National more than its newly formed peer Canadian Pacific Kansas Southern ( CP )? In fact, the latter has recently completed the merger creating the first Class 1 railroad connecting all three North American countries. However, railroads are massive businesses and it takes time to integrate tracks and run new smooth operations. Therefore, I don't think 2024 will be an exceptional year for Canadian Pacific.

Moreover, Canadian National is the Class 1 railroad with the safest balance sheet because it has been quite conservative on its buyback policy. In the past, most Class 1 railroads have taken on new debt to fund huge buybacks. Now that interest rates are higher, all of them had to reduce their share repurchases while Canadian National alone has been able to increase its total shareholder returns. Being conservative with the balance sheet pays off over the long-term.

So, with rail traffic picking up speed once again since September 2023, Canadian National is set to thrive in an environment where from north to south, from east to west, manufacturing facilities are being renovated or built from the ground up. Not only that, but as soon as each of these starts producing, Canadian National will also benefit from increasing volumes to be shipped.

Tailwind #3: Laptop replacement cycle begins

This one is an idea I have had since the 2021 peak in laptop sales as a consequence of the pandemic. The idea is simple. From 2020 to 2021 many people and many businesses upgraded their laptops (and most of the hardware, too). Usually, the average laptop lifespan ranges from 3 to 5 years. Tablets have a lifespan of 2 to 3 years, as smartphones do.

What I am expecting is that, starting in 2024, we will see the new replacement cycle beginning. So hardware producers are set to benefit.

I have to disclose I own a big position both in Apple ( AAPL ) and in Microsoft ( MSFT ). But my pick here is a company I still don't own, even though I am looking at it with interest.

Dell

Dell's ( DELL ) revenues show that every 3-4 years, there is a big bump up, showing the pace of replacement cycles. In the past two full fiscal years, Dell's revenues have been flat around $100 billion and from what we know so far about FY 2023, things won't be much different. So, we are approaching the time of a new bump in sales.

I said above I won't give any AI name. But, of course, Dell is related to AI.

Now, the company trades at a fwd PE of 11.3, which makes it very interesting considering its sales should increase between 2024 and 2025. In terms of profitability, the company reaches 24% in gross profit margins which, together with a few other metrics, is enough for SA quant grades to give the company an A+.

Conclusion

Here are my three favorite picks considering tailwinds we should see in 2024. If you have other suggestions and have made different picks, share them in the comment section below so that we can engage and discuss them together.

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