Year-to-date, market indices have rallied significantly, led by the magnificent seven. As of this writing, the Nasdaq 100 is up 36%, whereas the S&P 500 is up 13%. Despite the rally in the indices, not all stocks have participated. 2022’s winning sectors have been laggards and are reasonable hunting grounds for bargain stocks for 2023.
In the first half, market outperformance has been concentrated in technology. Utilities, healthcare, and energy have underperformed as investors have chased technology and consumer discretionary stocks. At the same time, financials have seen increased volatility since the start of the banking turmoil and trade at significant discounts to book value. However, despite the cheap valuations, it’s advisable to avoid banks. Their commercial real estate portfolios and potentially stringent capital requirements ahead pose significant risks.
Traditionally defensive healthcare presents better prospects. In addition to the underperformance, most healthcare stocks are now affordable stocks with high potential. Moreover, the sector enjoys multiple tailwinds, such as increased healthcare spending and an aging population. Another sector – industrials – had a sell-off in March due to recession fears and is only starting to recover. Notably, the industry is a significant reshoring and renewables beneficiary. These trends are in their early innings and can sustain demand for specific industrial goods and services.
These bargain stocks for 2023 have lagged behind the indices.
Going forward, each has a secular trend backing its growth outlook. Buy them at these bargain prices created by short-term challenges.
United Rentals (URI)
United Rentals (NYSE:URI) is the largest equipment rental company in the world. After peaking at $479 in early March, the stock sharply declined. The collapse of Silicon Valley Bank and the ensuing banking turmoil certainly played a role. Also, some investors started anticipating tighter lending that would negatively impact construction projects.
While a recession could still be on the horizon, URI stock has some positive catalysts. First, it stands as a massive beneficiary of the reshoring trend. After the supply chain issues from Covid-19 and the latest China-Taiwan tensions, the U.S. government and companies are trying to rebuild local supply chains.
Construction projects will soar as companies take advantage of the Inflation Reduction and Chips Act to bring back manufacturing capacity to the U.S. URI is a play on this theme. For now, the market doesn’t appreciate these catalysts, making it one of the top bargain stocks for 2023.
Financial results have been solid. In 1Q 2023, revenues grew 26.0% year-over-year (YOY), supported by broad-based demand in end markets. Management was optimistic and reiterated their 2023 outlook, pointing out business momentum and increased customer visibility. They expect $2.1 billion to $2.35 billion in free cash flow in 2023. Thus, the stock trades at 14 times the fiscal year (FY) 2023 FCF. And in terms of price-to-earnings (P/E), the forward multiple is 9.
At such bargain prices and considering the reshoring trend, URI stock is one of the must-buy bargain stocks in the industrial sector.
Centene Corporation (CNC)
This St. Louis, Missouri-based company provides managed healthcare insurance in the U.S. As of Dec. 31, Centene (NYSE:CNC) managed care had over 27.1 million members. CNC stock has had a rough start to the year, down 19% YTD. The rotation from defensive sectors to technology and growth led to a first-quarter sell-off. Then, recent comments by peer UnitedHealth (NYSE:UNH) about surging procedures for Medicare Advantage patients led to a broad-based self-off among healthcare plan names.
According to Well Fargo analysts, the sell-off is an opportunity. Although increased procedures will pressure costs, the impact on earnings will be minimal. The analysts expect a minimal -2.4% impact on Centene’s EPS.
Despite these recent fears, Centene is one of the best bargain stocks for 2023. It’s cheap and long-term fundamentals have never been better. Based on management’s FY2023 guidance of $6.40 in adjusted EPS, the stock trades at a forward P/E of 10. Besides, Centene will grow earnings over the long term due to secular healthcare tailwinds. According to CMS, Medicaid spending will average 5.6% annual growth between 2021 – 2030. And Medicare outlays will increase from $865 billion in 2021 to $1.5 trillion by 2029.
It’s not surprising that management expects to benefit from these trends. As CEO Sarah M. London outlined in Q1 2023 earnings, “We remain confident in our ability to deliver 12-15% long-term adjusted earnings compound annual growth in the back half of the decade.”
Brookfield Corporation (BN)
Brookfield Corporation (NYSE:BN) is a Canadian-based investment firm. The company owns and operates thousands of global real assets in real estate, pipelines, power generation and transmission, intermodal shipping, and communications infrastructure.
The current risk estate crisis is hitting Brookfield hard. Indeed, the firm is a major player in the sector, with over 7000 properties globally. A portion of its portfolio is in troubled office markets such as San Francisco and Washington, D.C. In April, the firm defaulted on several of its properties. Walking away from these mortgages has heightened investor concern.
Despite the gloom, Brookfield is among the top bargain stocks for 2023. From a fundamental standpoint, Brookfield’s real estate portfolio is solid. In a CNBC interview in May, CEO Bruce Flatt disclosed that troubled office properties were about 5% of their real estate portfolio. The rest was in quality real estate such as trophy or Class A office, industrial, hotels, and high-end retail. Per Q1 2023 earnings, its office assets had an 86% occupancy rate, and NOI increased by $56 million YOY. Moreover, the company is signing record-high lease prices on newly completed properties such as Two Manhattan West.
Finally, the company is widely diversified in renewable power and transmission, infrastructure, insurance, private equity, credit, and asset management businesses. Brookfield is highly undervalued, considering its ownership interests in other publicly traded issues. It owns 75% of Brookfield Asset Management (NYSE:BAM), 48% of Brookfield Renewable Partners (NYSE:BEP), 27% of Brookfield Infrastructure Partners (NYSE:BIP), and 65% of Brookfield Business Partners (NYSE:BBU).
Buying BN stock here provides a significant margin of safety. BAM, its crown jewel, will continue to grow assets under management as institutions shift to alternative asset investing. And the rest of the portfolio holds quality assets that will generate increasing cash flows for decades.
On the date of publication, Charles Munyi 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.
