WLFC - Marketplace Roundtable - 2023 Look Ahead - Value Stocks
Summary
- We continue our roundtable series with value analysis.
- Today we have seven contributors sharing their insights for 2023 and one top idea.
- Next up we will have Commodities.
~ By Ashutosh Gowli, Marketplace Specialist
Thank you to all readers of our first part of the 2023 Look Ahead Roundtable Series. So far we've covered Macro . Today we continue with Value coverage with analysis and top ideas from seven of our contributors.
Once again, the questions we asked were:
What are you expecting and/or looking for in your area of focus for 2023?
What is one of your top ideas for 2023 and why?
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Dhierin Bechai of The Aerospace Forum : In the aerospace industry I expect 2023 to be another tough year driven by supply chain challenges. High energy prices and labor shortages are continuing to pressure the ability to supply to the market while demand is high. While I do expect some stabilization in 2023, I do not expect that supply chain issues will fully dissolve. As a result, I continue to expect that manufacturers of commercial aircraft and defense equipment will not be able to fully satisfy demand. For defense, I would expect flattish performance while the recovery for commercial aircraft manufacturers should be somewhat stronger. While there's a damper on converting demand to value, the shortages particularly seen on the single aisle market provide solid support for aircraft values to appreciate next year. So overall 2023 will be another challenging year, but stabilization is one step in the recovery process in an industry that has an extremely long outlook. Airbus (EADSF) and Boeing (BA) previously had to dial back expectations for 2022, so for 2023 I expect they would not want to make that mistake again as they now better understand how big the disruption in the supply chain is.
Idea: With defense being somewhat flattish, I would look for better rewarding investment opportunities in the commercial aircraft space. So, you would end up looking at either Boeing or Airbus. Both companies somewhat disappointed in 2022 walking back on their delivery target and that risk does remain in 2023. For Boeing I would be hoping to see 40-45 deliveries per month in 2023 and 60 per month for competitor Airbus. A clear positive is that Boeing is winning back market share in the delivery mix, which I expect to be in the 40% to 45% range next year, but beyond that it relies on a significant boost in deliveries and while Airbus has already laid out plans to significantly boost production beyond rates previously seen, Boeing is looking at rate recovery rather than growing beyond previously observed levels. In terms of performance, you'd mark Airbus as the lower risk investment opportunity but if Boeing is able to deliver on its projections I could see a lot of risk of missing targets that is baked into today's price and price targets evaporate. Based on the lower-risk profile I would mark Airbus as the favorite, although I do see upside in the 25%-30% range for both names.
Disclosure : I am long Boeing ( BA ) and Airbus ( OTCPK:EADSF )
Value Digger of Value Investor's Stock Club : Most stocks including numerous growth stocks and numerous large-cap stocks tumbled in 2022. Actually, many of them crashed, as forecast. This was a reality check, because the fundamentals prevail sooner or later.
In contrast, there were select undiscovered or overlooked value stocks from the small-cap space that performed well or outperformed in 2022. And I recommended many of these outperformers to the subscribers on my value-based research.
After all, I believe that 2023 will not be different from 2022. So I forecast that many stocks including many growth stocks will continue to drop or underperform in 2023, and investors will beat the market in 2023, only if they buy select undiscovered or overlooked value stocks from the small-cap space that meet strict investment criteria. Technical analysis has to be part of the due diligence too.
Idea: One of my top ideas for 2023 is DAVIDsTEA ( DTEA ) at the current price of about US$0.80 per share. Fundamentally speaking, there's a big disconnect between DTEA's current valuation at US$0.80 per share and its fundamentals, which will become even bigger, once Q4 2022 is out. Specifically, I project that DTEA's Enterprise Value at US$0.80 per share will be almost zero, because the company is estimated to have about C$25 million in cash and zero debt at the end of Q4 2022.
Operationally speaking, DTEA will continue to implement its growth strategy by expanding in the U.S. and Canada in 2023. I believe that its expansion strategy will be successful largely thanks to the quality and flavors of its tea blends. Specifically, all teas are not created equal and DTEA's tea blends are of high quality with innovative proprietary flavors that don't exist in the vast majority of the other tea brands.
After all, I forecast that DTEA will be an outperformer in 2023, based on today's price of about US$0.80 per share.
Disclosure : Long DTEA
David J. Waldron by Quality Value Investing : The economist John Kenneth Galbraith told the Wall Street Journal in January 1993, "We have two classes of forecasters: Those who don't know, and those who don't know they don't know."
Thirty years later, I have found little, if any, evidence disputing Galbraith's assertion. Thus, I will be making no specific forecasts for 2023 or anytime as I do know that I don't know.
Idea: "Since I don't know what will do well or not in 2023, I will make no predictions. Instead, I will continue to focus on screening for the winning stocks of enduring enterprises with research limited to the company's current wealth and the stock price's present value. In other words, just the facts or as factual as one can expect from publicly-traded companies and the markets.
My dull and unconventional approach to stock market investing was cultivated from the collective wisdom of legendary investors Warren Buffett, Benjamin Graham, Peter Lynch, and Howard Marks. The strategy has produced a concentrated family portfolio that has outperformed the S&P 500 since 2009 based on the equal-cap weighted average total return of each holding.
In 2023, select major exchange-traded stocks that pass my checklist-based approach ( Course Module 101: Elements Of Quality Value Investing ) and earn bullish ratings will be shared with my subscribers toward their own due diligence to determine whether the stock picks are worthy of long-term buy-and-hold compounding potential within their respective portfolio objectives."
Disclosure : N/A
Thomas Lott by Cash Flow Compounders : We expect continued outperformance of small cap and value oriented equities. The growth bubble has deflated, and in our view the shift to value and away from megacap technology names reminds us of the Nifty 50 sea change in the 1970s. Peter Lynch earned 27% a year by buying neglected small caps starting in the late 70s. They were names ignored by the market and trading at bargain-basement prices. We see that today and are focused on finding value among quality small and mid cap names. We also continue to play the ESG arb for lack of a better term.
Idea: We just wrote up Global Payments ( GPN ) at the end of December as our top pick for 2023. Global Payments is a credit card processor with a tremendous track record of growing EPS by mid teens percentages. At 10x earnings, this high quality, high margin free cash flow machine is simply far too cheap. Per our work, the narrative that GPN is losing share to fintech startups is simply wrong (as we detail in our piece); pricing also is unchanged. There might be a recession impact here, but at current levels it appears priced for a Great Recession scenario (when EPS fell 34%). We deem that unlikely as in 2008-2009, a consumer credit bubble impacted card spending dramatically. Consumers are in far better shape today, but the stock is trading at a record low 10x valuation (historically GPN has been an 18x P/E multiple stock). GPN is also divesting a slower growth business and purchasing EVO Payments in Q1. Leverage will increase near term but by year end will be back to normalized levels. We think by then the deal uncertainty and near term recession risk/leverage risk will have dissipated, meaning GPN can re-rate back to 14-16x. On 2024 estimates and 15x, GPN has 75% upside.
Disclosure : Long GPN
Chris DeMuth Jr of Sifting the World : I'm looking for ideas that are safe, lucrative, and uncorrelated with the stock market such as Spectrum Brands ( SPB ). It finished Q3 under $40 per share, recovered to the low $60s and is worth over $80. The DoJ filed an antitrust suit to block an asset sale that would pay SPB in cash more than their entire market cap. The case is weak, especially after the companies named a strong buyer for overlapping product lines. The deal will probably get done by the middle of this year, which could catapult SPB shares.
Another: Willis Lease ( WLFC ) costs less than $60 and is worth over $100 per share. Management has been uglifying it in preparation for an MBO. They offered $45 and could pay $60-70 per share. While engines that they buy and lease out increase in value early in their lives, they mark them down to the lesser of their appraised and depreciated value. That leads to a stock trading at a big discount to book value and a book that is massively understated.
amplifyenergy.com
Idea: ABMD , TWTR , RENN , and AMPY were each bigger than practically any previous investments that I've ever made. 2022 simply offered big opportunities worthy of big (my biggest) swings. Three are largely done - TWTR closed on original terms, ABMD's tender offer expired, and RENN distributed cash to shareholders of more than twice the share price at the beginning of the year. RENN was my best long with a $33 upside and 90% probability of success. It cost under $10 when my position was first disclosed to StW. It more than doubled since it was subsequently disclosed to StW as my best idea for 2022. But that was 2022.
My best idea for 2023 is better: Amplify Energy ( AMPY ). It's fixing its broken pipeline, deleveraging its balance sheet, and preparing for a possible sale in whole or in parts by the end of this year. Shares cost under $8 and are worth 2-3x that. They could double after their pipeline is fixed by Q3 and triple in an asset sale or full M&A by the end of Q4. TL; DR: buy AMPY .
Disclosure : Long SPB , WLFC , and AMPY
Vladimir Dimitrov, CFA of The Roundabout Investor : The setup for this year is challenging for trend-following investors and will likely bring lots of opportunities for both value and growth stocks. In the former category, high quality names in consumer staples are in a good position to preserve wealth and outperform the market. They would benefit from a slowdown in inflation through 2023 and those businesses with strong brand portfolios will also fully capitalize on recent price increases.
With a recession looming on the horizon and a tight monetary policy in full swing, growth names are not yet a bargain. A whipsaw reaction in the short term also could be expected as speculation around a Fed pivot are running high. Regardless of what the Federal Reserve does, however, companies that did not succumb to short-termism and have low exposure to momentum trade are in a much better position to deliver superior returns. I'm already short-listing such businesses from technology, industrial and consumer discretionary sectors with the intent to buy more aggressively during the second half of 2023.
I also favor low duration fixed income and precious metals as excellent additions to all-equity portfolios.
Idea: I have a number of high conviction ideas for companies that are flying under the radar for most investors, but one of the more widely recognized names is Unilever (NYSE: UL ). As I mentioned earlier, consumer staples are well positioned to thrive in the current macroeconomic environment. In addition, Unilever's strategic pivot toward higher margin product segments, where the company also has well-established distribution channels globally, is starting to pay off. Collaboration between current management and the new activist investor is smooth and will further simplify the company's corporate structure. Unilever also trades at a significant discount to its major peers, even when taking into account the company's currently lower operating margins. Lastly, Unilever benefits from the falling U.S. dollar due to its heavy exposure to Emerging Markets.
In a nutshell, Unilever is unlikely to deliver exceptionally high returns to the same extent that smaller companies in high-growth industries could, however, the business is a solid buy for those looking to outperform the market on a risk-adjusted basis and are not comfortable with making risky bets in this highly uncertain environment.
Disclosure : I am long ULVR.L
Leandro González-Sicilia of Best Anchor Stocks : "Our portfolio is down just 4% over the last year and we did that by mostly ignoring price movements. For 2023, we will again focus on the performance of the companies in our Best Anchor Stock portfolio. Many investors try to forecast the performance of their stocks (not companies), but predicting things out of our control is not our game.
Sooner or later, the market always acknowledges strong fundamental performance. So, if our thesis is correct, the market will reward us with a higher stock price. For this reason, the most important thing for us is understanding if the initial investment thesis is still intact or if something has changed that should make us act. The stock price plays no role in that process.
Best Anchor Stocks should be resilient if there is a recession, as they're a must-have for companies. They have strong competitive positions and are highly profitable. While the stock price may move along with the total market, a recession is often a period in which financially strong companies get only stronger. They can often scoop up new small companies that can rejuvenate them or buy back shares on the cheap."
Idea: Our top idea for 2023 is Constellation Software ( CSU:CA ), even if it's already up 1,850% over the last decade and 12,610% since its IPO.
Constellation Software is a serial acquirer of Vertical Market Software companies. That means it buys software companies that only serve one particular market. Think of the software on your gym bike or to the right amount of animal food. Through the acquisition of these businesses, Constellation gives them a safe home, expertise, and a bigger market opportunity.
The company just closed another record year with 134 acquisitions, almost three per week. The average deal size is just $3.3 million, showing Constellation's unique deep decentralization. Employees deployed a record $1.7 billion. On top of that, in 2022, Constellation showed for the first time its magic also works for big deals, as it acquired Altera for roughly $700 million, its largest acquisition ever. The turnaround is in full swing.
And the market appreciates that. The stock is down just 9% from its 52-week high. The stock has never been down 30%; not during the COVID Crash, not during the Great Financial Crisis, not now. We think this outperformance will continue in 2023.
Disclosure : Constellation Software
For further details see:
Marketplace Roundtable - 2023 Look Ahead - Value Stocks