It shouldn’t surprise anyone in the U.S. that July 2023 was the hottest month ever recorded on Earth. It is so hot that some cities have gone an entire month without temperatures falling below 100 degrees Fahrenheit. Coincidentally, 2023 has been the summer for sizzling stocks.
The S&P 500 is up nearly 10% since the beginning of May and almost 20% year-to-date. With five months left in 2023, the index only needs to gain another 10 percentage points to deliver its best annual performance since 1997.
Because it’s been so darn hot, I thought I would focus my three hot summer stock picks on companies benefiting from hot weather. Whether it be HVAC providers or beverage producers, specific industries enjoy the hot weather more than others.
Based on this premise, I’ve selected three hot summer stock picks, with one choice each from large, mid, and small caps.
Here’s to summer!
Constellation Brands (STZ)
Representing large-cap stocks is Constellation Brands (NYSE:STZ). Its share price is up nearly 19% YTD.
One of its Mexican beer brands, Modelo Especial, has taken the fight to Bud Light this summer, surpassing it as America’s number-one-selling beer. In the four weeks ended June 3, Modelo grabbed 8.4% of U.S. beer sales in retail stores, 110 basis points higher than Bud Light.
It hasn’t all been good this summer. Activist investor Elliott Management has weighed in. On July 18, the company announced it had reached a cooperation agreement with Elliott that will see Constellation appoint two new independent directors, increasing the size of its board to 13. In addition, Elliott will refrain from any activist campaigns with the beer maker over the next year.
“We believe the company’s meaningful growth potential, powered by its premier Mexican beer portfolio, is not currently reflected in the company’s stock price, and represents a significant amount of value that can be created from here,” Bloomberg reported Elliott Management portfolio manager Michael Goldberg’s comments from the joint statement by the two companies.
People are thirsty in this hot weather. Modelo will continue to benefit.
Lennox International (LII)
Representing mid-cap stocks is Lennox International (NYSE:LII). Its share price is up nearly 55% YTD.
As stocks have grown in recent years, the definition of mid-caps has also increased. It used to be that a mid-cap was a company with a market cap between $2 billion and $10 billion. However, the average market cap is significantly higher if you look at most mid-cap ETFs today. For example, one of the largest mid-cap ETFs listed on a U.S. exchange is the Vanguard Mid-Cap ETF (NYSEARCA:VO). The average stock in its portfolio averages nearly $25 billion.
Lennox International has been in the heating and cooling industry since 1895. Today, it focuses on residential heating and cooling and commercial heating, cooling, and refrigeration. Its residential business accounted for 71% of its $4.5 billion in revenue in 2022 and 79% of its $760 million adjusted net profits.
Despite being up 55% in 2023, analysts are lukewarm about the company’s stock. Of the 19 analysts that cover it, only five rate it a Buy, with three giving it an Underweight or outright Sell, with a target price of $370, below the point of its current trading.
Analysts are focusing on the company’s valuation. By most metrics, it’s not cheap, but it’s not outrageously expensive. You will make out okay if you’re buying for the long haul.
As a result of its strong second quarter, Lennox raised its revenue and earnings guidance for 2023. It now expects sales to increase by 3% at the midpoint of its outlook, up from 2%. On the bottom line, it expects earnings of $15.75 a share, up from $14.75.
Lennox stock has underperformed over the past five years compared to its peers. I expect that to change over the next five.
EPR Properties (EPR)
Representing small-cap stocks is EPR Properties (NYSE:EPR). Its share price is up nearly 23% YTD.
Despite actors and writers striking this summer, the box office is on fire, thanks to the Barbie and Oppenheimer movies, which brought in 78% of the $311 million in U.S. box office revenues on the July 21-23 weekend. So excited are movie-goers that the term “Barbenheimer” has been coined for people who see the two movers on the same night.
And so, I’m recommending EPR, which owns many theaters where Barbie and Oppenheimer are playing. Movie theaters account for 40% of the real estate investment trust’s rents it collects.
EPR needs help with its movie theater tenants. Nonetheless, its revenues and adjusted funds from operations (AFFO) in the latest quarter — revenue up 8.8% with an AFFO increase of 12.4%, to $98.7 million — suggests that it too is on the mend.
“Our strong momentum from last year continued into the start of 2023,” stated Greg Silvers, Chairman and CEO of EPR Properties. “We are pleased with the strong recovery and the resilience of our experiential investments, as consumers continue to allocate post-pandemic discretionary spend on the drive-to, value-oriented leisure and entertainment options that our customers offer.”
Based on a monthly dividend of $0.275, it yields 7.3% at current prices.
On the date of publication, Will Ashworth 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.
