There could be a new market low in 2023. Investors can hide in these 5 stocks, says MKM Partners
The stock market could hit new lows in the new year, but there are some stocks in which investors can weather market volatility, according to MKM Partners. Many of the forces that have weighed on stock markets in 2022 will continue in 2023, at least in the first half of the year. That includes economic uncertainty in the wake of the Federal Reserve’s aggressive rate hikes to tame high inflation. “As 2023 progresses, we expect the economy to weaken under the weight of tight monetary policy and the continued decline in excess liquidity,” said Michael Darda, chief economist and market strategist at MKM. “A ‘tight and hold’ policy by the Fed could trigger a deeper-than-expected recession.” That does not bode well for stocks and means there is a high risk that the stock market will hit a new low next year, he said. In general, markets tend to bottom out about two-thirds of the way through a recession, not before it starts, according to the note. In such a market environment, MKM recommends focusing on defensive stocks and avoiding sectors that trade at high cyclical adjusted valuations. The firm put together a list of its top picks where investors can find safety, as they should withstand volatility in the first half of next year. Top Picks One of the top food and beverage picks for MKM is Walmart, which it believes is poised to outperform its peers and win in 2023. “Walmart is gaining share against its grocery peers, but the discretionary categories have been soft.” , analyst Bill Kirk. wrote. Still, there is upside potential for Walmart due to its dominance. He also expects the company to report fourth-quarter 2022 earnings growth early in the year and lead ahead of the competition for the remainder of 2023. Market share gains for Walmart,” he said. “With lower costs and Inventory pressures, profitability should improve further.” A turbulent economic environment is typically a negative for most companies, but could be a positive for O’Reilly Automotive, another top pick for MKM. “Persistent pressures on the spending have historically pushed consumers to keep their vehicles longer and do the repairs themselves out of economic necessity,” wrote analyst David Bellinger. of more than $40 amid more programmatic rebuys. In the insurance sector, MKM’s first choice is Arch Capital Group. “Arch Capital Group remains our top pick as it is the most leveraged (Re)Underwriter in the US at higher rates as the company’s cycle management strategy caused it to withdraw capacity when rates were lower and aggressively re-entered when rates began to rise in late 2018,” Harry Fong wrote. MKM sees investors overlooking how much leverage Arch has a positive entry into the current cycle. The company believes that Arch is close to improving earnings and that the outlook is positive. “Some investors continue to penalize the company for being in the mortgage insurance business,” Fong said. “However, the company has moved capital out of the mortgage insurance business (which is not its core business) and some of it has gone into the P&C business.” 47% at his target price. “We see it as the richest name in catalysts in the sector, and it is one of the most oil names with an oil reduction of more than 70%,” analyst Leo Mariani said. “We also expect the company to benefit from an increase in its market capitalization above $2 billion and modest deleveraging following the close of its merger with EnVen Energy, which should allow more investors to acquire it. In addition, Talos Energy is the only E&P company stock involved in carbon capture where that business is priced as a free option for investors, according to MKM.That success in 2023 should lead to multiple expansion, they said. The top five on the list is World Wrestling Entertainment, which has an advantage of more than 22% over MKM’s target price, due to the growth opportunities present for the company, although upcoming US television rights negotiations USA for Raw and Smackdown are the biggest catalysts, MKM sees other significant events such as international expansion, improved brand monetization, mon digital and web marketing and possible mergers and acquisitions.— CNBC’s Michael Bloom contributed to this report.