Although 2023 has been a banner year thus far, with the S&P 500 up 20% YTD and the Nasdaq 100 up 46% YTD, I think there are some concerning data points leading me to enter 2024 cautiously. However, even though I am a bit worried, there are a few stocks that should perform well regardless of the kind of economic landscape.
Recession Indicators
One well-known recession marker is the treasury yield curve inversion. What is often not included about the indicator is that it isn’t the inversion that signals a recession, but rather the disinversion. In the chart below, which shows the spread between the 10yr treasury yield and the 2yr treasury yield, we can see that the normalization of the yield curve precedes the recession marked in gray.
We can also see in the chart below, that the curve is nearing this disinversion signal. Although these signals are not a guarantee, it has definitely alerted me to a possibility of increasing market uncertainty.
We have also seen a marked deterioration in the job market, as well as some rapid revisions lower in US GDP growth estimates. Just this week we saw both job openings and ADP employment figures come in well below estimates.
Additionally, following the Q3 GDP estimates showing an impressive 5.3% figure, Q4 annualized GDP estimates have fallen to just 1.2%. All these factors together have my me anticipating at least a moderate slowdown sometime in early 2024.
Discount Mega-Cap Tech
Both Alphabet GOOGL and Meta Platforms META are trading at very appealing relative valuations. Even after a strong performance this year for both stocks, the valuations are still below historical averages. Furthermore, their business models are as secure as ever, with billions of people using the products daily.
Meta Platforms is trading at a one year forward earnings multiple of 22.3x, below its 10-year median of 26.6x, and Alphabet is trading at a one year forward earnings multiple of 22.8x, below its 10-year median of 26.3x.
Furthermore, these companies are both producing tremendous free cash flow, especially relative to the valuations. Free cash flow yield is one of my favorite ways to value companies, as FCF is a no-nonsense measure of business profitability.
Alphabet is near its 10-year high at 4.7% FCF yield and although Meta is well off its high from last year it is still well above its average at 4.5%. These are the most compelling mega-cap tech stocks of the bunch in my opinion.
Both companies are also forecasting the highest EPS growth estimates among the magnificent seven. GOOGL estimates EPS growth over the next 3-5 years of 16.6% annually, and META expects 21.3%.
The combination of strong growth and fair valuations make these two stocks especially appealing in the case of a downturn or a strong market. If there is a slowdown like I expect may happen, these stocks have limited downside. And if I am wrong, and the economy is strong, they should benefit tremendously.
Coinbase Global
Coinbase Global COIN on the other hand, while not trading at a discount valuation, is appealing in its own way. If market uncertainty rises in 2024, investors may rotate into Bitcoin as a way to hedge their portfolio’s, which should in turn push COIN stock higher as well.
We can see exactly that happened this year as the price of Bitcoin is up 166% YTD and Coinbase Global stock is up nearly 300% over the same period. Coinbase Global has also benefited from the crackdown on cryptocurrency exchanges, as nearly all of them have been hampered by regulatory issues.
Although COIN has experienced similar changes, it seems to have dealt with them in a more effective way and is now the clear leader in the space. Being the biggest brand in crypto means Coinbase should continue to attract new entrants in the market.
COIN has also seen some very strong earnings estimate increases from analysts, giving it a Zacks Rank #2 (Buy) rating. Current quarter earnings estimates have been revised higher by 56% in the last month and are projected to climb 91% YoY. FY23 earnings estimates have jumped by 22% and are expected to grow 92% YoY.
Bottom Line
Of course, nobody knows for sure what the economy will look like in three to six months but based on the evolving environment I lean to the defensive side. Fortunately, some of the best companies in the market are still trading at attractive levels, which allows investors to still participate even in a challenging environment.
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Although 2023 has been a banner year thus far, with the S&P 500 up 20% YTD and the Nasdaq 100 up 46% YTD, I think there are some concerning data points leading me to enter 2024 cautiously. However, even though I am a bit worried, there are a few stocks that should perform well regardless of the kind of economic landscape.
Recession Indicators
One well-known recession marker is the treasury yield curve inversion. What is often not included about the indicator is that it isn’t the inversion that signals a recession, but rather the disinversion. In the chart below, which shows the spread between the 10yr treasury yield and the 2yr treasury yield, we can see that the normalization of the yield curve precedes the recession marked in gray.
We can also see in the chart below, that the curve is nearing this disinversion signal. Although these signals are not a guarantee, it has definitely alerted me to a possibility of increasing market uncertainty.
We have also seen a marked deterioration in the job market, as well as some rapid revisions lower in US GDP growth estimates. Just this week we saw both job openings and ADP employment figures come in well below estimates.
Additionally, following the Q3 GDP estimates showing an impressive 5.3% figure, Q4 annualized GDP estimates have fallen to just 1.2%. All these factors together have my me anticipating at least a moderate slowdown sometime in early 2024.
Discount Mega-Cap Tech
Both Alphabet GOOGL and Meta Platforms META are trading at very appealing relative valuations. Even after a strong performance this year for both stocks, the valuations are still below historical averages. Furthermore, their business models are as secure as ever, with billions of people using the products daily.
Meta Platforms is trading at a one year forward earnings multiple of 22.3x, below its 10-year median of 26.6x, and Alphabet is trading at a one year forward earnings multiple of 22.8x, below its 10-year median of 26.3x.
Furthermore, these companies are both producing tremendous free cash flow, especially relative to the valuations. Free cash flow yield is one of my favorite ways to value companies, as FCF is a no-nonsense measure of business profitability.
Alphabet is near its 10-year high at 4.7% FCF yield and although Meta is well off its high from last year it is still well above its average at 4.5%. These are the most compelling mega-cap tech stocks of the bunch in my opinion.
Both companies are also forecasting the highest EPS growth estimates among the magnificent seven. GOOGL estimates EPS growth over the next 3-5 years of 16.6% annually, and META expects 21.3%.
The combination of strong growth and fair valuations make these two stocks especially appealing in the case of a downturn or a strong market. If there is a slowdown like I expect may happen, these stocks have limited downside. And if I am wrong, and the economy is strong, they should benefit tremendously.
Coinbase Global
Coinbase Global COIN on the other hand, while not trading at a discount valuation, is appealing in its own way. If market uncertainty rises in 2024, investors may rotate into Bitcoin as a way to hedge their portfolio’s, which should in turn push COIN stock higher as well.
We can see exactly that happened this year as the price of Bitcoin is up 166% YTD and Coinbase Global stock is up nearly 300% over the same period. Coinbase Global has also benefited from the crackdown on cryptocurrency exchanges, as nearly all of them have been hampered by regulatory issues.
Although COIN has experienced similar changes, it seems to have dealt with them in a more effective way and is now the clear leader in the space. Being the biggest brand in crypto means Coinbase should continue to attract new entrants in the market.
COIN has also seen some very strong earnings estimate increases from analysts, giving it a Zacks Rank #2 (Buy) rating. Current quarter earnings estimates have been revised higher by 56% in the last month and are projected to climb 91% YoY. FY23 earnings estimates have jumped by 22% and are expected to grow 92% YoY.
Bottom Line
Of course, nobody knows for sure what the economy will look like in three to six months but based on the evolving environment I lean to the defensive side. Fortunately, some of the best companies in the market are still trading at attractive levels, which allows investors to still participate even in a challenging environment.
Zacks Reveals ChatGPT "Sleeper" Stock
One little-known company is at the heart of an especially brilliant Artificial Intelligence sector. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion.
As a service to readers, Zacks is providing a bonus report that names and explains this explosive growth stock and 4 other "must buys." Plus more.
Download Free ChatGPT Stock Report Right Now >>
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