There are just a couple of weeks left in 2022. I’ve been tasked with selecting the seven best stocks to buy for 2023. With so many bad performances in the past year, it’s difficult to know who will bounce back in 2023.
Could Tesla get off its slide, down nearly 60% year-to-date? Will energy stocks deliver a repeat performance? Up 53% YTD, the S&P 500’s energy stocks look like a lock in 2023.
According to MarketWatch, 92 stocks in the index are rated as Buy by at least 75% of the analysts covering the companies. That compares to 93 companies at the end of 2021.
For this list of the best stocks, I’ll pick four stocks I expect to rebound in 2023 — that means they’re down more than the index in 2022 — and three that will deliver a repeat performance, which means they’re up for the year.
In addition to the performance criteria noted above, I’ll also select stocks diversified across at least five sectors, with a return on assets and operating margin of at least 20% and a market capitalization of at least $2 billion.
These may be the best stocks, but here’s to the entire stock market rebounding in 2023.
|PM||Philip Morris International||$102.94|
Year-to-Date Return: -20%
Return on Assets: 46.3%
Operating Margin: 65.9%
Citigroup initiated coverage of VeriSign (NASDAQ:VRSN) on Dec. 13 with a Buy rating and a $243 target price, 20% higher than where it is currently trading. Only four analysts cover VeriSign stock, with two giving it an Overweight or Buy rating with a target price of $229.50.
The company is a global domain name registry services and internet infrastructure provider. It owns two of the 13 global internet root servers that keep the internet functioning.
VeriSign reported its Q3 2022 results at the end of October. The company experienced growth on both the top and bottom lines. Its revenues were $357 million, 6.8% higher than a year earlier, with a 7.0% increase in earnings to $169 million.
As part of its earnings report, it announced an additional $803 million in share repurchases for its share repurchases program. VeriSign t is now authorized to buy back $1 billion of its stock.
It finished the third quarter with 174.2 million .com and .net domain name registrations, 1.2% higher than a year earlier. Its operating margin in the third quarter was 66.3%, one basis point higher than Q3 2021.
VeriSign expects the domain name base in 2022 to increase between 0.25% and 1% over last year.
You’re not going to get rich from VRSN stock, but it’s one of the best stocks for above-average returns over the long haul.
Year-to-Date Return: -17.8%
Return on Assets: 28.7%
Operating Margin: 21.4%
The Virginia-based homebuilder has struggled in 2022 as the housing market softened due to higher interest rates. Despite the headwinds faced by NVR (NYSE:NVR), the company remains one of the country’s largest homebuilders.
Homebuilding revenues in the quarter were $2.74 billion, 17% higher than a year earlier. Its mortgage banking business supplies mortgages to NVR home buyers. Its mortgages in the quarter were $1.66 billion, 2% higher than in Q3 2021.
NVR was actively selling homes in 423 communities across the U.S. in the third quarter, up from 414 in Q3 2021.
Of the seven analysts covering its stock, three rate it a “Buy” with no “Sell” or “Underweight” ratings, and a $4,984 target price, 6% higher than where it’s currently trading.
As inflation begins to reverse course in the first half of 2023, I expect that the prognosis for NVR stock will improve dramatically. However, I realize it will take courage to buy any large homebuilders at this point in the cycle.
Idexx Laboratories (IDXX)
Year-to-Date Return: -32%
Return on Assets: 26.7%
Operating Margin: 26.1%
As an animal lover and someone who’s fostered more than 40 rescue cats over the past 18 months, Idexx Laboratories (NASDAQ:IDXX) has always been on my radar. The company’s Companion Animal Group provides diagnostic and information-based products to veterinarians in the U.S. and elsewhere.
While it has two other operating segments: Water and Livestock, Poultry and Dairy (LPD), its CAG segment accounts for 90% of its overall revenue and 88% of its operating profit.
The company’s 2022 Investor Day presentation points out on page eight that the global companion animal diagnostics market opportunity is $37 billion. It serves approximately 15% of this market, with higher penetration in the U.S. (22%) and almost no penetration in Latin America (2%) and elsewhere.
The diagnostics revenue generated by the average U.S. vet practice continues to rise. Over the past seven years through 2021, diagnostics revenues have grown at 10.5% annually, 400 basis points higher than in the six years between 2010 and 2015.
In addition, as pets get older, the amount spent at an average clinic almost doubles from $355 for puppies and kittens to $630 or more for animals eight years of age or older. Price increases in recent months are not an issue with its customers.
However, at nearly 11x sales, you’ve got to be prepared to hold IDXX for the long haul because its share price might not increase at the pace you’d like in 2023 and beyond.
Year-to-Date Return: -20%
Return on Assets: 24.2%
Operating Margin: 20.9%
Fastenal (NASDAQ:FAST) is a distributor of industrial and construction products. It started by selling fasteners from a store in Winona, Minnesota. Today, it has more than 400,000 active customers from 1,716 branches and 1,567 onsite locations at other businesses’ facilities.
Approximately 82% of its 3,283 locations are in the U.S., with the rest in Canada and elsewhere. In November, Fastenal reported that it hit $1 billion in year-to-date eCommerce revenue for the first time in its history. It might have taken 20 years to hit this significant milestone, but $2 billion in a calendar year should come much sooner.
I always see how much a company hires to understand its growth. Fastenal’s total headcount in November was 22,378, 9.0% higher than a year earlier and 0.8% higher than in October 2022. Across the board, it was hiring in November. That’s excellent news.
The company’s top three end markets are manufacturing (41% of 2021 revenue), heavy equipment manufacturing (27.0%), and construction (11.1%).
Fastenal’s return on invested capital in Q3 2022 was 29.8%, 310 basis points higher than in Q3 2021. Its net earnings in the third quarter were $1.97 billion, 20.5% higher than a year ago.
Fastenal continues to perform at a very high level.
Year-to-Date Return: 31%
Return on Assets: 30.0%
Operating Margin: 27.5%
Nucor (NYSE:NUE) is the first of my three selections that made money for shareholders in 2022 and ought to deliver a repeat performance in 2023.
Even though the steel maker’s 2023 results won’t be as robust as they were in 2022, it is still an excellent stock to own for the long haul.
On Dec. 8, Nucor announced that it was investing in Electra, a Colorado-based start-up developing a process to produce carbon-free iron for steel production.
Nucor continues to innovate in the steelmaking process so that it can produce steel for its customers that is sustainable and cleaner than traditional products.
This kind of innovation likely prompted UBS analysts to up its target price from $120 on Dec. 6 to $145, a 20% increase. While UBS rates NUE as Neutral, it indicates that the analysts had too low a target for the following year.
Unless the company reports terrible news in late January, I expect $145 will be a floor price for Nucor stock in 2023.
Marathon Oil (MRO)
Year-to-Date Return: 63%
Return on Assets: 21.3%
Operating Margin: 46.2%
Marathon Oil (NYSE:MRO) has seen its stock appreciate by nearly 85% over the past five years, almost all of the gains coming in the past year. The integrated oil and gas company is back, thanks to the 2022 resurgence in energy prices.
Marathon reported third-quarter results in early November that were better than expected.
Several analysts made news as a result of its earnings.
At the end of November, Raymond James analyst John Freeman raised his target price by $11 to $48 while reiterating his Strong Buy rating. Meanwhile, on Dec. 7, Barclays analyst Jeanine Wai upped her target by $1 to $35 while maintaining her Overweight rating.
Of the 27 analysts who cover MRO, 14 rate it as Overweight or an outright Buy. Surprisingly, four have an Underweight or outright Sell rating on MRO stock.
I look at the company’s $4.1 billion trailing 12-month [key ratios] free cash flow — which works out to a free cash flow yield of 23.1% based on its $17.58 billion market cap — and find it hard to believe that it won’t do well in 2023.
It’s still pretty darn cheap.
Philip Morris International (PM)
Year-to-Date Return: 6.9%
Return on Assets: 21.2%
Operating Margin: 38.5%
Philip Morris International (NYSE:PM) announced on Nov. 28 that it would delist Swedish Match stock after acquiring 93% of the outstanding shares, forcing the compulsory redemption of those outstanding.
The maker of Marlboro cigarettes is paying $16 billion to acquire the Swedish company known for its alternative smoking products such as ZYN nicotine pouches, General snus, Longhorn moist snuff, and America’s Best Chew chewing tobacco.
The acquisition accelerates its goal to generate half its annual revenue from alternative smoking products by 2025.
In November, I included PM in a list of seven of the best bear market stocks to buy, providing investors with value, stability, and yield. However, in Philip Morris’s case, it’s also generating growth through Swedish Match.
Between all of the company’s alternative smoking products and IQOS heated tobacco products, Philip Morris is the tobacco stock to own for the long haul.
Of the 19 analysts covering its stock, 11 rate it Overweight or an outright Buy, with a $102.64 target price. I expect these targets to rise in 2023 as analysts become more familiar with Swedish Match and the benefits it brings to the company.
Trading at 5.0x sales, it’s not cheap at the moment. However, the 5.0% dividend yield makes it much easier to bet on the company.
I’m not a big “sin stock” guy, but if you’re going down this road in 2023, PM is one of the best to do it with.
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.