The second half of 2020 and 2021 saw one of the most incredible bull markets the world had ever seen. But the very conditions that created that bull run in the first place – namely rock-bottom interest rates and trillions of money flooding the system – also sowed the seeds of its own downfall.
We saw that in 2022 – which was the worst year for the stock market since 2008. 2023 has been much better, with markets showing a clear path to recovery.
But conditions are very different, meaning the top stocks that we believe investors should pay the most attention to this year will be very different from the previous years.
With that in mind, here are 4 criteria we used to help narrow down the list.
- Doesn’t rely on cheap money. The flow of cheap money pumped up the entire tech sector – including many companies that were simply not fundamentally sound. With interest rates the highest they’ve been in 15 years, cheap money simply doesn’t exist anymore. Stocks on this list must show that they can operate without this inflow of cheap money.
- Strong growth catalysts on the horizon. This one is pretty obvious, but still worth stating. We’re not looking for stocks that will just flatline – but ones that have good reason to further soar this year.
- Can thrive under economic uncertainty. The most-predicted recession of all time may be looming and geopolitical tensions have only been ramping up. Stocks on this list must have that degree of demand resiliency that will allow them to thrive through such uncertainty.
- Not too expensive. It seems unlikely that valuations will be able to surpass those seen in 2021 for quite some time. Therefore, purchasing any stock that is a little too close to their 2021 valuations – no matter how promising – is not a smart move. We don’t want to focus on “cheap stocks” (they’re usually cheap for a reason), but stocks where their valuations have room to post substantial gains.
Now, with all that out of the way, let’s look at the 5 stocks we’re betting on in 2023.
Stock #1 – Deere & Company (DE)
Agriculture is not going anywhere. With geopolitical conflicts only increasing the demand for food production, agricultural machinery manufacturer Deere stands to benefit significantly.
As of end-May 2023, the stock is down by about 15%, giving it a current P/E ratio of 12x – making it a particularly attractive opportunity considering that its recent forward guidance has been nothing short of extraordinary.
For FY2023, the company projects a net income range of $9.25 billion to $9.5 billion, which would surpass its combined net income of the previous eight years. This exceptional financial guidance alone makes it a strong contender.
But add on its near-term growth catalysts, and you have a standout stock that every investor should be paying more attention to this year.
To mitigate cyclicality and secure long-term growth, Deere is implementing its LEAPS (Leading Enterprise Automation Platform and Solutions) strategy.
Other than leveraging autonomous software-as-a-service (SaaS) products to revolutionize farming productivity, Deere intends to develop fully autonomous tractors which would skyrocket efficiency for farmers around the world – and add immense value to the company.
In short, Deere is a company that looks set to benefit from the current macroeconomic climate. And with its recent unprecedented financial guidance – coupled with strong growth catalysts from its LEAPS strategy – Deere is an undervalued stock that investors should be paying close attention to.
Stock #2 – ASML Holding N.V. (ASML)
In the race between global powers, the importance of semiconductors continues to soar, and ASML, the world’s largest producer of lithography systems, stands to reap the rewards.
ASML holds an unrivaled position as the sole producer of extreme ultraviolet (EUV) lithography systems – a massive market advantage. These cutting-edge systems enable the manufacturing of the world’s smallest, densest, and most power-efficient chips.
With no competitors in the capital-intensive EUV market and a wide economic moat, ASML enjoys near-absolute pricing power that has allowed it to withstand past cyclical slowdowns.
Plus, as a partner of Nvidia, ASML also stands to win out from the transformative growth potential of AI technology. Nvidia’s new GPUs are the primary GPUs used to power AI systems, and ASML’s lithography systems play a crucial role in the production of these GPUs. With the AI revolution only gaining steam, demand for ASML’s machines should only continue to grow.
And here’s even better news – thanks to all the investor attention on Nvidia, ASML is trading at a much more reasonable P/E of 39x compared to Nvidia’s 203x.
ASML’s recent financial performance also surpassed analysts’ expectations, accompanied by a robust forecast for the rest of 2023. This strong financial trajectory is supported by the company’s massive order backlog, valued at 39 billion euros, which surpasses its 2023 revenue forecast of 26 billion euros.
With an enduring monopolistic position in chip-making technology, ASML commands a premium in the market, reflective of its indispensable role in the semiconductor industry.
In sum, ASML emerges as an undisputed leader in the semiconductor landscape, equipped with technological superiority and a dominant market position. Its monopoly in EUV lithography, strategic partnerships, exceptional financial performance, and the ongoing AI revolution underline its compelling investment potential.
While the stock may not be inexpensive, the premium it commands is justified by its indispensable role and near-absolute pricing power.
Stock #3 – CrowdStrike Holdings, Inc. (CRWD)
As more and more of our lives – and companies’ infrastructure – move online, cybersecurity is more crucial than ever. Bad state actors are constantly threatening US infrastructure, and that’s not even mentioning malicious actors simply out for a quick and illegal buck.
And CrowdStrike, a leading player in the cybersecurity realm, is poised to capitalize on the escalating demand for cybersecurity solutions – which is projected to reach a staggering $425 billion by 2030.
CrowdStrike’s expertise lies in endpoint protection, the critical front line where most threats originate. According to IDC, the company has held the highest endpoint market share for three consecutive years.
A lot of it comes down to CrowdStrike’s threat detection platform, which – unlike many of its competitors – was purpose-built from the ground up with AI.
And while CrowdStrike may dominate the endpoint market, it also offers a range of additional services, including cloud workload security, threat intelligence, and identity protection. These additional services help fuel its impressive revenue growth – thanks to the company’s proven ability to upsell and cross-sell its clients (over half of its customer base uses at least 5 of its products).
CrowdStrike’s growth prospects remain exceptional, with earnings projected to soar 50% in FY24 and an additional 27% in FY25 and revenue forecasted to grow 34% in FY24 and 28% in FY25.
Despite its stellar performance and immense growth potential, CrowdStrike is currently trading at a relatively attractive valuation. It’s currently trading at a price-to-sales ratio of 13.5x – which is near its lowest point since going public.
Make no mistake however, Crowdstrike is firmly a growth play. The company remains unprofitable due to stock-based compensation. Its healthy free cash flows are reinvested into growth. But its balance sheet is robust, with cash and cash equivalents of about $2.4 billion compared to under $800 million in total debt. In short, it’s not dependent on cheap money to keep going.
So, if you’re looking for a reasonably-priced growth stock with strong near-term potential – CrowdStrike is one best-in-class stock to consider.
Stock #4 – Shopify Inc. (SHOP)
Ecommerce may not have reached the lofty expectations people expected through the pandemic, but make no mistake – it’s here to stay. And while ecommerce has become synonymous with Amazon, Shopify may be a much more attractive play.
Despite still being down over 60% from its November 2021 highs, Shopify’s stock has rallied in 2023, surging over 70% in the first five months of the year. This momentum reflects the company’s solid financial performance, with $1.5 billion in revenue and $116 million in monthly recurring revenue (MRR) in the first quarter of 2023, representing year-over-year growth of 25% and 10% respectively.
Strategic moves have further bolstered confidence in Shopify’s future prospects. The company made the decision to trim down its operations by laying off 20% of its workforce and redirecting its focus to its core e-commerce software offerings. By divesting its logistics business, Deliverr, in exchange for equity in Flexport, Shopify has chosen to concentrate on its real bread and butter – an area with significant growth potential.
Shopify’s strategic shift aligns with the industry trend, recognizing that software holds the key to sustained profitability. Even e-commerce giant Amazon has recognized the importance of software, cloud services, and digital advertising as the primary revenue drivers.
Shopify’s growth story is reinforced by two key factors. First, international diversification opens up new opportunities, expanding its reach and customer base beyond borders. Second, its point-of-sale solution continues to gain impressive traction, further solidifying its position as a comprehensive e-commerce solution provider.
Additionally, Shopify’s new product, ShopifyAudiences, has demonstrated its ability to enhance merchants’ paid advertising capabilities, effectively doubling return on ad spend (ROAS). This innovation not only fuels merchants’ growth but also strengthens Shopify’s larger ecosystem.
Finally, while Shopify is not yet profitable, its balance sheet is solid –with total cash and short-term investments of about $5 billion eclipsing its $1.4 billion worth of debt. It’s not reliant on the cheap money spigot that no longer exists.
To conclude, while Shopify is undoubtedly another growth stock, it has become a leaner and meaner company that could be a worthwhile addition for investors looking to capitalize on the ecommerce growth story.
Stock #5 – VanEck Gold Miners ETF (GDX)
In the face of escalating geopolitical risks, dedollarization, and inflationary pressures, gold emerges as a potent hedge. And gold miners offer investors leveraged exposure to the price of gold.
But the gold miner market is very fragmented, so if you try to pick and choose just one – you’re most likely to miss.
The VanEck Gold Miners ETF (GDX) offers a compelling solution, providing broad-based exposure to the entire gold mining sector – worth an estimated $392 billion a year.
As for why investors should consider adding gold miners to their portfolios in 2023 – one only needs to look at the state of the world to get the answer.
Its capability to hedge against inflation is one of them. But there’s also the fact that gold remains relatively underrepresented in institutional portfolios, potentially giving the sector a boost as the institutions seek to rectify that.
And here’s the big one – the world is running out of new gold. It’s called the “gold supply cliff”, and it’s a situation years in the making – as exploration budgets have steadily fallen over the past decade even as the price of gold has increased.
In short, as the world becomes more turbulent, all investors should have at least some exposure to gold. And GDX offers a diversified and leveraged way of doing so.