Dave Sekera: After starting the year in overvalued territory, following a 25% decline in the stock market, we now think the equity market is significantly undervalued.
However, as the market continues to contend with the headwinds we identified at the beginning of the year, we expect volatility to remain high for the foreseeable future.
To establish a solid bottom, markets are looking for a re-acceleration of economic growth and evidence that inflation will moderate next year.
3 Top Stocks for Q4 2022
These 5-star stocks are considered undervalued. Data as of Oct. 14, 2022.
- Simon Property Group (SPG)
- Boston Beer (SAM)
- Service Today (NOW)
In this scenario, where the market can quickly jump and fall based on economic and inflationary metrics, I prefer to stick with stocks that benefit from broader trends and long-term secular growth themes.
For example, one of the trends we continue to expect over the next 12 to 18 months is the normalization of consumer behavior as the pandemic subsides. During the pandemic, there has been a major shift in consumer spending towards goods and away from services. We expect that as behavior normalizes, spending will return to prepandemic trends.
Two of the best picks from our analyst team that capitalize on this trend include: Simon Property Group and Boston Beer.
Simon Property Group is a REIT that specializes in investing in Class A shopping malls. The stock is rated 5 stars, trades at a 41% discount to our fair value, and pays over a 7% dividend yield.
REIT stocks have significantly underperformed the broader market this year due to the impact of rising interest rates, and mall operators’ stocks have been especially hard hit as investors are skeptical of retail real estate.
Based on our analysis, we think Class A malls will benefit as foot traffic continues to recover. In addition, mall operators are doing several things to keep themselves relevant in a world with ever-increasing online sales. For example, they changed the portfolio of retailers in their malls to stay relevant to consumers and evolved to become more experiential. Malls increasingly offer more services like restaurant dining, doctors’ offices, and exercise facilities–things that can’t be replicated online.
For investors looking for stocks in the defensive category, I would highlight Boston Beer. We assign Boston Beer a narrow economic moat based on a combination of its intangible assets and cost advantage compared to other craft brewers. The stock is rated 5 stars and trades at about half our fair value.
During the pandemic, the amount of alcohol consumption did not actually decrease, but it shifted to drinking at home from on-premise drinking. And there, consumers trade up to lower-priced brands. As consumers return to public events, we expect consumption to return to on-premise. According to our analysis, consumers are more brand conscious when they order alcohol in public and tend to choose higher priced, higher margin branded drinks.
For investors looking to invest in the technology sector, one stock that we think is being overlooked by the market is ServiceNow.
We have assigned ServiceNow a wide economic moat based on the high cost of moving to its clients. The stock is rated 5 stars and trades at a 45% discount to our fair value.
For those of you unfamiliar with the company, ServiceNow provides service-desk software solutions for many corporate functions.
The company has generally performed in line with our expectations so far this year. However, its revenue growth has been hampered by foreign-currency-exchange translation due to the rapid appreciation of the US dollar this year.
ServiceNow’s success has been rapid and remarkably organic, and we expect the top line to grow at a compound annual growth rate of 24% over the next five years. The company generates free cash flow margins of more than 30%, placing it near the top of the software space. Finally, the company has a strong balance sheet and is able to ride out any potential economic storm.
Watch “Where to Invest Your Money in Q4 2022” from Dave Sekera for more investment ideas.