Now is the perfect time to check your positioning ahead of the new economic environment
Along with a 50 basis point interest rate hike, Federal Reserve Chair Jerome Powell announced today that policymakers will look for “substantially more evidence to have confidence that inflation is on a sustained downward path.” Still, recent data has signaled a possible inflation peak, causing market participants to consider their positioning ahead of the new economic environment.
The November consumer price index report showed a lower-than-expected increase for the second month in a row, signaling that inflation may have peaked. Consumer prices rose just 0.1% in November from the previous month and 7.1% from the previous year, where economists expected a 0.3% monthly increase and a 7.3% increase year-over-year.
If inflation has peaked and the worst is behind us, certain stocks are set up to potentially gain. This list will look at three stocks that should get a boost as inflation subsides.
As price increases slow down, consumers may spend more, providing a boost to some battered consumer discretionary names. Amazon (AMZN) tops our list of stocks to consider on peaking inflation as its share price has been nearly cut in half this year on higher inflation and rising rates.
Amazon is by far the world’s largest e-commerce company and, in 2021, surpassed Walmart as the world’s largest retailer outside of China. Without a direct competitor in the U.S., the company has experienced rapid growth through its third-party marketplace. The company operates 110 fulfillment centers worldwide, with 110 in the U.S.
Amazon’s business model has built-in advantages like its subscription service, Amazon Prime, and its streaming platform. The service currently has more than 200 million subscribers globally and 163.5 million in the U.S. That figure is expected to continue to expand at a steady pace. According to a report by Statista, U.S. Prime members are expected to reach more than 176.5 million by 2025.
The e-commerce market may continue to suffer in the coming months amid recession fears. Nevertheless, the $9 trillion industry is still expected to expand at a CAGR of 14.7% for at least the next four years. Considering the online shopping behemoth held five times the market share of its closest rival, Walmart, its 38% leading market share, means it will likely gain the most significant advantage from the market’s growth.
Even though the tech sector, in particular, has been hit this year, Citi and Goldman Sachs both recently named the tech titan as one of their top picks for 2023, echoing the sentiment of many of Wall Street’s pros. Of 53 analysts offering recommendations for AMZN, 48 call it a Buy, and 4 call it a Hold. There are no Sell recommendations for the stock. A median price target of $136 represents a 46% upside from Wednesday’s closing price.
Whether inflation has peaked or not, healthcare is an undeniable necessity. Our following recommendation is a small but profitable pharma biotech company with massive expansion plans in the wings. The company also pays a sizeable dividend to shore up your portfolio for what could be coming.
Drugmaker, Viatris’ (VTRS) portfolio currently comprises more than one thousand approved molecules across a wide range of key therapeutic areas, including globally recognized iconic and key brands, generic, complex generic, and biosimilar products. Branded products include EpiPen, Amitiza, Lipitor, and Viagra. Its biosimilar portfolio includes pegfilgrastim, trastuzumab, and adalimumab biosimilars.
Viatris is profitable, but it is looking for more growth. The company reported revenue of $4.1 billion in the third quarter, down 10.1% year over year. Adjusted earnings came in at $0.87 per share, surpassing consensus estimates, but down from $0.99 per share the year-ago quarter.
The company generated $144 million in revenues from products launched in 2022, primarily driven by lenalidomide, its myeloma treatment, its interchangeable insulin injectable Semglee, and its unbranded insulin pen in the United States. It is on track to achieve approximately $525 million in new product revenues in 2022, which is below expectations due to the timing of launches but with better-than-expected margins.
Viatris’ earnings are expected to contract by 4% in 2022, and the stock is down 21% year to date. However, analysts, on average, expect Viatris to rise nearly 18% going forward, according to FactSet. The reason behind Wall Street’s optimism is changes to the company’s business plan that have already been set into motion.
The company is in the process of trimming its less-profitable operations, including its biosimilars, women’s health division, and its over-the-counter drugs. In its place, the company is adding an ophthalmology franchise through the $750 million acquisitions of Oyster Point Pharma and Famy Life Sciences. The deal is expected to close in the first quarter of 2023, the company said, adding that it sees the acquisitions generating at least $1 billion in sales by 2028.
The company has a relatively high debt-to-equity ratio of nearly two, but it has the right idea by trimming its less-profitable operations and paying down its debt. Management sees revenues expanding at a CAGR of 3% between 2024 and 2028 and EPS expanding at a CAGR of around 15% over the same period. VTRS hopes to use the expanding revenue to reward its investors through steady dividend growth. Its current yield is 4.4%, and its payout ratio is very safe at 20%. Though it’s a speculative recommendation based on the success of the company’s business transition, the rewards could be handsome.
Cyclical stocks have had a tough time in 2022, but 2023 could be a banner year for growth stocks as inflation cools and the Fed eventually finishes the rate hiking cycle. One notable growth name that got hammered in 2022 is Meta Platforms Inc. (META). The stock currently trades at its cheapest level at less than 17x forward earnings, and it may have further to fall. Still, with the most prominent family of apps and 4 billion users worldwide, META’s recovery could be swift when tech turns around.
Meta was once one of the world’s most valuable companies and is considered one of the Big Five American information technology companies, alongside Alphabet, Amazon, Apple, and Microsoft. As of 2022, it is the least profitable of the five, and has fallen from the list of the top twenty biggest companies in the United States. The company owns Facebook, Instagram, and WhatsApp, among other products and services. In October 2021, the parent company of Facebook changed its name from Facebook, Inc., to Meta Platforms, Inc., to “reflect its focus on building the metaverse.”
The metaverse is still in its embryonic stages, but an increasing number of market participants are jumping in on the companies they believe will lead the way into this fantastic new iteration of the internet. For investors who want to get their foot in the door now, pioneering META seems like a good choice, especially since its price has been slashed more than 66% over the past year.
Signs of a weakening ad market have been apparent as prices have risen across the board. Regulatory troubles, layoffs, and management changes have intensified the pain for META this year. But as inflation cools, Meta’s commercial ad spend seems likely to recover as soon as the second half of 2023. If investors should be greedy when others are fearful, the perfect time to scoop up shares of the social media giant.
Of 58 polled analysts, 38 recommend buying META stock, while 19 rate the stock as a Hold, and only 1 rate it as a Sell. A median price target of $145 represents an increase of 20% from Wednesday’s closing price.
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