Investors who avoided losing money this year are positioned to consider stocks that are strong conviction buys. An investment idea earns that level of faith when management demonstrates a consistent history of leadership.
For maximum return potential, the stock would have a high margin of safety. When investors buy securities that trade significantly below their intrinsic value, the market compensates them for taking risks. Before 2023 begins, companies that hired too many in 2022 will restructure.
They will review all excess operating expenses that do not add meaning to business growth. Already, markets may have punished the company’s share price for the lower operating profits. In the upcoming year, investors will snap up companies that sustain growth at lower costs.
The relentless panic selling in 2022 also created better entry prices for trending companies. Investors should review why those companies fell. In addition, readers should ask if the underlying business of a company whose stock has a high bearish bet against it is broken.
The table above includes companies with a grade colored in green. Those with low scores trade at the biggest discount today.
|Brookfield Asset Management
|Molson Coors Beverage
Alphabet (NASDAQ:GOOG) investors worry that ChatGPT, which optimizes language models or dialogue, threatens the search engine giant. On the artificial intelligence front, the industry is still in the very early innings.
Alphabet is progressing with advancing its search engine. BERT is a pre-training language that is in its search algorithm. Similarly, MUM, or multitask unified model, is the next major paradigm shift for Google Search. MUM works with natural language understanding. It can answer complicated questions using multimodal data.
Google’s sophisticated implementation of MUM and BERT is not the main reason investors should buy the stock in 2023. Google is advancing its search tools beyond queries. For example, Google Lens offers users visual search. In broader terms, AI does not just benefit Lens. It will affect Google’s suite of products. Furthermore, YouTube could pitch better, more relevant ads to users with AI.
Alphabet has strong business momentum from here. Google Cloud is a long-term opportunity to expand free cash flow growth.
Brookfield Asset Management (BAM)
Brookfield Asset Management (NYSE:BAM) manages $400 billion in assets that generate fees. It will benefit from secular growth within assets, a global energy, and private markets. On Dec. 9, 2022, it changed its name to Brookfield Management.
In 2023, Brookfield will continue its asset management business growth of 15% to 20%. Investors should expect this pace of growth for the next five to ten years. The company has many core products in the infrastructure sector.
Brookfield is astute in finding secular growth themes. For example, infrastructure and transition are massive businesses worth trillions of dollars. Chief Executive Officer Bruce Flatt said that the area needs capital investments in digitization, deglobalization, and decarbonization.
Companies need to invest in operations that lower carbon output. Brookfield reallocates their capital. It earns revenue by building wind and renewables on a take-or-pay basis. Investors may forecast consistent revenue growth from such contracts.
BAM stock scores 54/100 on quality (per Stockrover). However, its return on investments will rise as it signs more deals related to infrastructure investments next year.
Operating costs rose in Argentina due to regulatory changes. Fortunately, DLocal expects its net revenue retention rate to hover above 150 basis points. In the current quarter and 2023, the company will diversify its business geographically.
DLocal is a market leader in Latin America. Merchants in more geographies will rely on its payment methods. To increase its appeal, the company will solve complex problems for its merchants. Its customers will appreciate the value added to DLocal’s offering.
Asia and Africa are becoming more relevant to DLocal’s business. It is too early to evaluate the net take rates. However, as the payment mix for DLocal increases in those geographies, the company’s addressable market will expand in 2023 and beyond.
Fulgent Genetics (FLGT)
Fulgent Genetics (NASDAQ:FLGT) is a diagnostic genetic sequencing supplier. In November, it acquired Fulgent Pharma, a clinical-stage pharmaceutical firm, for around $100 million. This will result in a vertically integrated firm that offers therapeutics and diagnostics to fight cancer.
In the third quarter, Fulgent posted billable tests topping 952,000, down from 2.2 million a year ago. Demand for Covid testing will fall as countries learn to live with the virus. The company closed its Houston operation and cut back operations in Temple City.
FLGT stock could potentially rise if governments decide to restart mass Covid testing. Still, Fulgent expects its Inform Diagnostics to grow. It forecasts revenue of $178 million in 2022, up by 92% Y/Y.
To expand profits, Fulgent is investing in long-term growth. In 2023, the overall business should rebound from strengthening its diversified portfolio. Margins will recover as Fulgent relies less on Covid-related testing.
Lumentum Holdings (LITE)
Lumentum Holdings (NASDAQ:LITE) sells 3D sensing solutions. In the last quarter, it posted a one-cent loss per share. The company lowered its revenue and EPS guidance for the fiscal second quarter of 2023.
Lumentum is a rebound play for 2023. The chip shortage is the main reason for the weaker guidance. Fortunately, hyperscale customers need 3D sensing components. The company will offset the disruption in the hyperscale market with growth in the Telecom sector.
Demand for Lumentum’s commercial lasers remains strong. The company broadened its portfolio by acquiring the IPG Telecom transmission product line. As a result, the company will have 400G ZR/ZR+ products for hyperscale data center operators and peering networks.
Investors should brace for a negative seasonality for Lumentum’s 3D sensing business in the current quarter. This will have an impact on gross margins. The company will offset those headwinds by managing operating expenses. It will consolidate its facilities. By fiscal 2024, the lower costs will lift operating earnings.
Molson Coors Beverage (TAP)
Molson Coors posted a non-GAAP EPS of $1.32. It expects net sales will grow in the mid-single-digit percentage. The company may count on products like Coors Light and Miller Light. Beer is the consumer’s favorite. In choosing between hard liquor and beer, they have a preference for the former.
Molson Coors revitalized its business three years ago. It focused on its core brands, investing in growth for its premium products. Looking ahead, the company will adjust its European operations. This includes raising prices in Western Europe. In the Asian Pacific region, it is increasing its marketing efforts. In 2023, investments in Madri will lift sales in emerging markets and Asia.
PagSeguro Digital (PAGS)
In 2023, PagSeguro has strong tailwinds that will unlock its growth. PagBank revenue will grow. In addition, it has new credit products that will increase net interest income revenue.
The company started shifting its priorities away from nano-merchants a few quarters ago. It did not generate strong profits from the point-of-sale services. The shift hurt its latest results. Long-term investors may look beyond the underperformance. When merchant churn decreases and PagSeguro adds more clients, results will improve.
PagSeguro is lowering its operating expenditure leverage. This will offset financial expenses related to its credit card business. Furthermore, when the economy improves, the firm may increase promotions to accelerate client growth. Its profit margin per client will benefit from the combination of price increases and one-stop-shop banking offerings.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.