Three Stocks to Watch for the Week of January 2nd

Stocks posted a negative week and losing month to close out the worst year that the market has seen since 2008. The three major stock indexes snapped a two-month string of gains. The Nasdaq fell nearly 9% in December, the S&P 500 dropped almost 6%, and the Dow pulled back around 4%.  

After posting gains in the three previous years, the market turned sharply negative in 2022. For the year, the S&P 500 finished down 18.1%. The Dow’s setback was comparatively modest at 6.9%, while the Nasdaq lagged with a 32.5% decline. 

In the holiday-shortened week ahead, investors can expect an update on the labor market due out on Friday. The release covering December follows a report that showed the economy generated 263,000 new jobs in November—the fourth consecutive month with jobs gains in the 200,000 to 300,000 range and the 23^rd month in a row with at least 200,000.

The stock market just wrapped up its worst year in decades. But every cloud has its silver lining. Eventually, every bear market throughout history has represented an opportunity for patient investors looking to pick up shares in desirable names at bargain prices. The question isn’t “if” you should be looking for stocks to buy, but which stocks to buy. This list will cover three tickers to consider in the weeks ahead.  

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Cyclical stocks had a tough time in 2022, but 2023 could be a banner year for growth stocks as inflation cools and the Fed eventually finishes the rate hiking cycle. One notable growth name that got hammered in 2022 is Meta Platforms Inc. (META). The stock currently trades at its cheapest level at less than 17x forward earnings, and it may have further to fall. Still, with the most prominent family of apps and 4 billion users worldwide, META’s recovery could be swift when tech turns around. 

Meta was once one of the world’s most valuable companies and is considered one of the Big Five American information technology companies, alongside Alphabet, Amazon, Apple, and Microsoft. As of 2022, it is the least profitable of the five and has fallen from the list of the top twenty biggest companies in the United States. The company owns Facebook, Instagram, and WhatsApp, among other products and services. In October 2021, the parent company of Facebook changed its name from Facebook, Inc., to Meta Platforms, Inc., to “reflect its focus on building the metaverse.”  

The metaverse is still in its embryonic stages. Still, an increasing number of market participants are jumping in on the companies they believe will lead the way into this fantastic new internet iteration. For investors who want to get in the door now, pioneering META seems like a good choice, especially since its price has been slashed more than 66% over the past year.

A weakening ad market has been apparent as prices have risen across the board. Regulatory troubles, layoffs, and management changes have intensified the pain for META this year. But as inflation cools, Meta’s commercial ad spend seems likely to recover as soon as the second half of 2023.   If investors should be greedy when others are fearful, this may be the perfect time to scoop up shares of the social media giant.  

Of 58 polled analysts, 38 recommend buying META stock, while 19 rate the stock as a Hold, and only 1 rate it as a Sell. A median price target of $145 represents an increase of 21% from Friday’s closing price.  

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One of the hardest hit sectors of the year, real estate, has been a bright spot in markets recently, thanks to fast-falling mortgage rates. According to bankrate.com, the national average for a 30-year fixed mortgage hit a high of 7.2% on November 11th and has since pulled back to around 6.5%. Homebuilders have benefited from the deep dive over the past week and should continue to do so as long as mortgage rates continue to lower. 

According to some Wall Street pros, we may have a “once-in-a-cycle opportunity” to cash in on the early-cycle outperformance phase of homebuilder stocks, begging the question – which home builders are best positioned in the lower-mortgage-rate environment?    

Companies likely to be best positioned are the largest-scale players. Our first recommendation for the week ahead is the number one home builder in America since 2002, D R Horton Inc (DHI).   Founded in 1978 in Fort Worth, Texas, D.R. Horton operates in 106 markets in 33 states across the United States and closed 83,518 homes in its homebuilding and single-family rental operations during its fiscal year ended September 30th, 2022. 

The company is engaged in the construction and sale of high-quality homes through its diverse brand portfolio, which includes Emerald Homes, Express Homes, and Freedom Homes, with sales prices generally ranging from $200,000 to over $1,000,000. It also provides mortgage financing, title services, and insurance agency services for its homebuyers through its mortgage, title, and insurance subsidiaries. 

In its most recent quarter, D.R. Horton missed analyst estimates for earnings and revenue due to the cooling housing market. From June to September 2022, the company’s total homebuilding lot position decreased by 25,000 lots. Still, the company has been actively managing the lot and land pipeline and investments in lots, land, and development to meet needs during this transition in the housing market. 

Impressive performance, industry-leading market share, a solid acquisition strategy, a well-stocked land supply, lots, and homes, and affordable product offerings across multiple brands are expected to drive growth. D.R. Horton’s earnings are expected to grow 1.7% in fiscal 2023. The stock has gained 24.9% over the past three months, outperforming the industry’s 19% rise. DHI stock has a solid Buy rating from the pros offering recommendations. A median price target of $95 represents an increase of 7% from Friday’s closing price. 

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The airline industry has seen a remarkable recovery in 2022 thanks to increasing travel demand and consumers’ willingness to pay higher fares. With airline stocks currently trading at very low multiples, many long-term-minded investors are eyeing the group, wondering which of these beaten-down tickers is the most attractive value.

Delta Airlines (DAL), the second airline company to have joined the coveted S&P 500 Index, commands more than a 17% share of the domestic aviation market. As you would expect, most of the Atlanta-GA-based carrier’s revenues are realized from its airline segment. What might surprise you is that 10% of the $29.9-billion amount generated in 2021 came from the company’s refinery segment, which operates for the benefit of the airline division by providing it with jet fuel from its own production.

Fuel savings are crucial to a functioning aviation industry in this next chapter. From increasing costs to environmental impact, airlines have had plenty of reasons to save every bit of jet fuel they can. Delta recently revealed details of how its fleet renewal program has helped to save tens of millions of gallons of fuel.  

Last week, the airline heavyweight raised its Q4 and full-year 2022 guidance and forecast an upbeat 2023, driven by robust demand. The company now expects the fourth-quarter 2022 operating margin to be 11%. Management sees adjusted earnings per share in the $1.35-$1.40 range (the earlier outlook was in the range of $1-$1.25). For the full-year 2023, DAL expects 15-20% year-over-year revenue growth. Earnings per share and operating margin for 2023 are expected in the $5-$6 band and 10-12% range, respectively. 

Delta has been more conservative than some competitors in bringing back capacity, but the carrier aims to have its network restored to 2019 levels next summer. In the meantime, several competitors have had to cut routes and scale back on expansion plans as supply chain, and labor constraints have delayed the production of new aircraft. Airlines continue to struggle with labor shortages, but for Delta, bookings remain strong into early 2023.

Delta shares are currently very cheaply priced at less than 8 times earnings. The stock garners an 85% Buy rating on Wall Street. A median consensus price target of $45 represents a 37% increase from Friday’s closing price.