13 stocks that are down for 2023 but may bounce back in 2024 or beyond

By Philip van Doorn

John Buckingham of the Prudent Speculator takes a hard look at opportunities brought about by the stock market's focus on short-term developments

Some investors put themselves in "value" or "growth" camps, either preferring to invest in companies trading low to book value, or expected earnings or by some other measure, or preferring to focus on rapidly growing companies, even if their relative stock valuations are high.

But John Buckingham, editor of the Prudent Speculator, argues that "all investing is value investing. You want to buy stocks that are undervalued to where you expect them to be in the future."

During an interview, Buckingham named 13 stocks that have declined during 2023, that he believes have upside potential ranging from 24% to 76% from here.

The Prudent Speculator is published by Kovitz Investment Group of Chicago. It has the top performance ranking among newsletters for 30 years through Sept. 30 at the Hulbert Financial Digest. For that period, the TPS portfolio's average annual return was 13.79%, according to Mark Hulbert. In comparison, the average annual return for the S&P 500 SPX during that period was 9.83%, according to FactSet.

Buckingham and his team follow TPS methodology to manage money for individual investors and through the Al Frank Fund VALAX, named after the original editor of the newsletter.

Methodology and picks among downtrodden stocks

The Prudent Speculator team begins with a group of about 2,800 liquid stocks of companies listed in the U.S. (including secondary listings by non-U.S. companies) and then scores them by a variety of metrics, to identify those that trade at relatively inexpensive price multiples to sales, earnings, free cash flow, book value or by total enterprise value to operating earnings. Low valuation by these screens for a large group of stocks has tested well over time, relative to the broad market, Buckingham said.

Some investors in the growth camp will point to the risk of "value traps." A company's stock may be attractive based on a low valuation and a high dividend yield, but if there is a fundamental weakness to its business, the share price may keep tumbling.

In its "2024 Stock Market Outlook," the Prudent Speculator team wrote that it cannot always avoid value traps, but that it has added "qualitative reviews of our companies to the mix in an attempt to ensure a viable business model, healthy competitive position, able management and, in the case of many cyclical companies, the wherewithal to make it through to the next upswing. "

The screens and qualitative analyses are used to narrow down the investible universe to 125 recommended names in the newsletter. The TPS target prices "incorporate our view of each company's long-term growth prospects, so that the stocks we choose to buy offer significant total return potential (capital appreciation and income) relative to the risk we think is inherent in our ownership," Buckingham said.

He also emphasized how the TPS methodology has led to a long commitment to companies such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT), both of which are among the largest holdings in portfolios managed under the strategy. Neither of these stocks is included in the Russell 1000 Value Index RLV, but both appeared to be good values when Buckingham first purchased them for the TPS portfolio. He said Apple originally was "a balance sheet play," way back before the first iPod was introduced. "We have sold chunks along the way" of Apple and Microsoft over the years, he said, to lower risk as the stocks have continued to rise.

13 favored stocks that have trailed this year

Through Dec. 21, the S&P 500 was up 25.6% for 2023 with dividends reinvested, with 342 (or 68%) of the stocks showing positive returns.

Among the 125 buy-rated TPS stocks, Buckingham highlighted 13 that have declined during 2023. Here they are, listed alphabetically:

   Company                                                                                  Ticker   2023 return  Forward P/E  Dividend yield  Dec. 21 price  TPS price target  Upside potential implied by TPS price target 
   Air Products and Chemicals Inc.                                                           APD            -10%         20.5           2.58%        $271.74           $343.03                                           26% 
   Alexandria Real Estate Equities Inc.                                                      ARE             -9%         36.3           3.94%        $128.89           $203.40                                           58% 
   Chevron Corp.                                                                             CVX            -13%         10.6           4.01%        $150.71           $186.73                                           24% 
   Corning Inc.                                                                              GLW             -2%         15.4           3.71%         $30.18            $43.68                                           45% 
   Juniper Networks Inc.                                                                     JNPR            -6%         12.6           3.01%         $29.21            $38.84                                           33% 
   Lockheed Martin Corp.                                                                     LMT             -5%         16.8           2.81%        $448.02           $561.12                                           25% 
   MetLife Inc.                                                                              MET             -6%          7.1           3.17%         $65.59            $87.71                                           34% 
   Nutrien Ltd.                                                                              NTR            -20%         11.6           3.74%         $56.68            $91.75                                           62% 
   Pfizer Inc.                                                                               PFE            -42%         12.3           5.93%         $28.31            $47.12                                           66% 
   Target Corp.                                                                              TGT             -3%         15.5           3.16%        $139.37           $191.69                                           38% 
   Tyson Foods Inc. Class A                                                                  TSN            -14%         23.1           3.79%         $51.66            $69.48                                           34% 
   Whirlpool Corp.                                                                           WHR            -12%          7.6           5.92%        $118.34           $208.80                                           76% 
   World Kinect Corp.                                                                        WKC            -14%          9.9           2.43%         $23.07            $34.17                                           48% 
                                                                                                                                      Sources: Kovitz for TPS stock selection and price targets, FactSet for all other data. 

Click on the tickers for more about each company, index or ETF.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

Pfizer Inc. (PFE) has been a fascinating example of how the stock market can reward and then punish a company. Here is a five-year price chart for the stock:

Investors were more than enthusiastic about Pfizer's leading position when working with BioNTech SE (BNTX) to develop and deploy a Covid-19 vaccine during the pandemic, but success brings punishment. Here are annual sales and earnings-per-share numbers for Pfizer since 2019 (with estimates for 2023-2025):

   Year                  Sales    EPS 
   2019                $41,172  $2.87 
   2020                $41,651  $1.02 
   2021                $81,288  $3.88 
   2022               $100,330  $5.47 
   2023 (Est.)         $58,709  $1.53 
   2024 (Est.)         $60,077  $2.31 
   2025 (Est.)         $62,980  $2.77 
                      Source: FactSet 

Last week, Pfizer disappointed investors with its 2024 guidance. This followed a $9 billion cut to Pfizer's revenue guidance for 2023, as Covid-19-related product sales continued to decline and as the company took charges related to excess Covid-related inventory and the return of emergency-use doses of Paxlovid by the U.S. government.

But now, Pfizer's stock is trading for only 12.3 times the consensus EPS estimate for the next 12 reported months, among analysts polled by FactSet. In comparison, weighted aggregate forward price-to-earnings ratios are 19.5 for the S&P 500 and 18 for the S&P 500 healthcare sector.

Looking at the consensus EPS estimates for Pfizer, above, the expected two-year compound annual growth rate through 2025 for the company's profit is 34.4%. This compares with expected two-year EPS CAGR of 12% for the S&P 500 and 15.2% for the healthcare sector.

Pfizer pays a quarterly dividend of 42 cents a share. The annual payout rate of $1.68 makes for a dividend yield of 5.93%, based on the closing price of $28.31 on Thursday. One way to consider a company's ability to continuing paying dividends, or to raise them, is to look at its expected free cash flow yield. Free cash flow is remaining cash flow after capital expenditures. It is money that can be used to raise dividends, buy back shares (which can lower the share count and raise earnings per share), expand or for other corporate purposes.

The consensus estimate among analysts polled by FactSet is for Pfizer's free cash flow to come in at $2.65 a share in 2024, for an estimated free cash flow yield of 9.36% based on Thursday's closing price. That indicates plenty of headroom to cover or raise the dividend.

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12-23-23 0719ET

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