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Citigroup's 1Q Profit Surpasses Projections

Aside from its high dividend, Citigroup also looks like a value stock at current levels, trading for less than eight times forward earnings and just 0.48 times book value.(GETTY IMAGES)

The year 2022 was a lousy one for the stock market. Even after factoring in dividends, the S&P 500 fell 19.4% in those 12 months, while the tech-heavy Nasdaq composite took a 33.1% haircut. The catalysts behind Wall Street's sell-off are all too familiar: Inflation, soaring interest rates, persistent recession fears and the Russia-Ukraine war snowballed into an avalanche of worries that investors couldn't ignore, and many previously high-flying stocks took a beating as the "risk off" mindset came to dominate markets. This, thankfully, provided a window of opportunity for investors to snap up great companies at a discount entering the new year.

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Before each new year, U.S. News selects 10 stocks to buy for the year ahead. Here's a rundown of the 10 best stocks to buy for 2023 and how each has fared in the first half of the year based on total returns, which include dividends:

STOCK YTD TOTAL RETURNS THROUGH JUNE 30

Apple Inc. (ticker: AAPL) 49.7%

Dutch Bros Inc. (BROS) 0.9%

Citigroup Inc. (C) 3.9%

Amazon.com Inc. (AMZN) 55.2%

Walt Disney Co. (DIS) 2.8%

PayPal Holdings Inc. (PYPL) -6.3%

EOG Resources Inc. (EOG) 

-9.7%

Grupo Aeroportuario del Sureste SAB de CV (ASR) 

21.6%

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) 

36.8%

Diageo PLC (DEO) 

-1.8%

Return of Equally Weighted Portfolio 15.3%

Apple Inc. (AAPL)

First up is Apple, the largest publicly traded company in the world, if you exclude government-backed behemoths such as oil giant Saudi Aramco. Like other tech stocks, AAPL shares had a rough go of it in 2022, as recession fears and soaring interest rates spooked investors in the sector. Following a rare 26.4% pullback in 2022, Apple shares surged 49.7% in the first half of 2023, recently hitting all-time highs and eclipsing the $3 trillion mark for the first time in history. The iPhone maker now trades at around 32 times earnings, reflecting the market's confidence in the company's strong competitive moat.

Apple recently unveiled its newest product, a virtual reality headset dubbed the Apple Vision Pro, which will retail for $3,499. While that price tag will likely make it a niche product in the early days, investors are hoping some iteration of the technology will emerge as a new source of meaningful revenue alongside product lines like the Apple Watch and the Mac.

Dutch Bros Inc. (BROS)

While massive, established companies like Apple can offer investors some stability, smaller companies have more room for expansion and can boost portfolios. Enter the rapidly expanding coffee chain Dutch Bros, which for comparison's sake, is roughly 0.2% the size of Apple despite being worth about $4.7 billion. Revenue grew like a weed in 2022, surging 48.4%. With initial roots on the West Coast, Dutch Bros locations are almost entirely in the West and Southwest, with 716 locations in 14 states through the end of March.

The small footprint of its drive-thru stores means they are relatively cheap to open, allowing for faster expansion. That shows up in the numbers: Dutch Bros opened 133 new stores in 2022, which works out to location growth of 25%. While the company's stock got off to a hot start in 2023, shares sank in early May after a quarterly earnings report that fell below analysts' expectations. Shares are up less than 1% this year through June 30.

Citigroup Inc. (C)

Next up is Citigroup, a roughly $90 billion multinational bank with both retail and investment banking arms. What Citigroup offers investors is twofold: First, it pays a healthy 4.4% dividend yield, which is a nice buffer for shareholders in an era of rising rates and high inflation. Importantly, that dividend is sustainable over time, with Citigroup using less than 30% of earnings to finance its payouts. Aside from its high dividend, Citigroup also looks like a value stock at current levels, trading for less than eight times forward earnings and just 0.48 times book value. Famed investor and financial guru Warren Buffett began buying Citigroup stock in the first quarter of 2022, and Berkshire Hathaway Inc. (BRK.A, BRK.B) now owns a roughly $2.6 billion stake in the company. Citigroup stock is up 3.9% in 2023 through June 30.

Amazon.com Inc. (AMZN)

Dominant internet retailer Amazon was also named one of the 10 best stocks to buy for 2023. The e-commerce giant had a miserable 2022 in which shares lost 50% of their value. The culprits included cost inflation, a tight labor market, supply chain challenges and dwindling consumer confidence. That said, the market was far too eager to write off Amazon, whose crown jewel is Amazon Web Services, its large, fast-growing and massively profitable cloud services arm. AWS has an annual revenue run rate of more than $85 billion. Given cloud services rival Microsoft Corp. (MSFT) trades for about 12 times sales, putting the same multiple on AWS pegs its value at $1.02 trillion. At Amazon's roughly $1.3 trillion valuation, investors are getting the rest of the company's massive operations – which posted 2022 sales of $434 billion – for about $280 billion. AMZN has proven to be a great pick thus far in 2023, with shares up 55.2% through June 30.

Walt Disney Co. (DIS)

One of the most important things to consider when selecting stocks to buy and hold for the long term is a company's management team. And with the recent return of longtime CEO Bob Iger, Disney has that in spades. Considered one of the best CEOs this side of the millennium, Iger presided over a series of wildly successful acquisitions – including Pixar, Marvel Entertainment and Lucasfilm – before passing the CEO role to Bob Chapek in February 2020. Disney's May earnings report saw the House of Mouse meeting expectations for both earnings and revenue. A recent price hike for streaming service Disney+ helped soften the blow of a huge loss in subscribers, largely from its India platform Hotstar. DIS stock is up 2.8% this year through June 30.

SEE: 9 Highest Dividend-Paying Stocks in the S&P 500

PayPal Holdings Inc. (PYPL)

A time-tested financial stock, PayPal is curiously trading for less than its 2020 pandemic lows, despite earnings per share of $4.13 in 2022 – higher than any year between 2018 and 2020. Shares were absolutely hammered in 2022, shedding 62% due to a weaker macro environment and the loss of its lucrative relationship with eBay Inc. (EBAY). Shares now trade for about 13.5 times expected 2023 earnings, despite a five-year average ratio of 35.5. Between 2015 and 2021, PayPal's lowest price-to-earnings (P/E) ratio was 20.3.

Applying that conservative multiple to its average expected 2023 earnings of $4.94 yields a price of $100.28 per share by early 2024, implying a 50% upside from its June 30 close at $66.73. Recently announced deals with Apple Pay to accept PayPal- and Venmo-branded cards should expand its presence in brick-and-mortar retail, while Amazon also now accepts Venmo (which is owned by PayPal), giving PayPal exposure to Amazon's vast online marketplace. PYPL shares tumbled in May after the company reported less-than-stellar earnings and lowered its 2023 operating margin estimate, and the stock is down 6.3% in 2023 through June 30.

EOG Resources Inc. (EOG)

A return pick from last year's best stocks to buy list, EOG is a U.S. oil and gas producer coming off a successful 2022 in which shares posted a total return of 56.3%. Shares nonetheless are still priced like a value stock, trading for less than 10 times forward earnings. Growth will likely decelerate in 2023 – the red-hot energy market is unlikely to skyrocket as it did in the inflation- and war-plagued year of 2022 – but investors shouldn't forget the value of an inflation hedge in their portfolios. A 3% dividend yield and impressively low payout ratio of less than 20% give EOG some credibility with income investors as well. As inflation concerns ebbed in the first half of 2023, EOG shares have lost ground. The stock has a year-to-date loss of 9.7% through June 30.

Grupo Aeroportuario del Sureste SAB de CV (ASR)

Another return pick from last year's list, this off-the-beaten-path stock is an $8.6 billion Latin American airport operator. The only industrial on this list, ASR also offers geographic diversification and is a mid-cap company that isn't on most investors' radars. The stock was a diamond in the rough in 2022, posting a total return of 17% in a bear market. It helps, of course, that passenger traffic has been growing: In May 2023, passenger traffic increased 3.2% year over year, as a 6.8% increase in Mexico and a 15.5% jump in Puerto Rico offset a 14.2% decrease in Colombia. Airport operators earn money when airlines rent out gates and pay landing fees, as well as from parking, ground transportation, airport retail and advertising, among other sources. The stock pays a trailing dividend of 2%, and shares have posted a total return of 21.6% in 2023 through June 30.

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)

Taiwan Semiconductor Manufacturing, a $530 billion business and the dominant high-level foundry for advanced chips, is next on the list. In the semiconductor industry, foundries are companies that manufacture chips for other companies, and TSM enjoys a massive market share for chips 7 nanometers and under. Apple, which has started to shift its supply chain away from China, is one of TSM's biggest customers. While the company reported mild gains in revenue and net profit in the first quarter, those numbers were down 18.7% and 30% from Q4 2022, respectively. Still, the stock is trading at less than 20 times forward earnings and paying a 1.8% dividend, and TSM shares have been crushing it in early 2023, posting gains of 36.8% through June 30.

Diageo PLC (DEO)

Last up is Diageo, the nearly $100 billion U.K.-based beverage giant. A consumer defensive stock, Diageo should be able to hold up in a strained macro environment, as alcohol tends to be relatively recession-resistant. As with tobacco, alcohol consumers tend to have a fair degree of brand loyalty, and the company's slate of elite brands gives it enviable positioning in its space, with bar staples such as Johnnie Walker, Guinness, Tanqueray, Don Julio, Smirnoff, Baileys, Ciroc and Bulleit all under its umbrella. Despite net sales jumping 21.4% in fiscal 2022, the stock fell with the broader market last year, losing 17.4%. That's largely due to its base in the U.K. and a bad year for the British pound. That slump can't last forever, and shares now trade for about 19 times forward earnings, a discount to its five-year average forward P/E of 24.4. As of the first quarter, Diageo is also part of Berkshire Hathaway's portfolio, with Buffett buying up about $40 million in DEO stock in the first quarter of 2023. Shares of the defensive stock have slipped by 1.8% through June 30.

All rights of this article go to John Divine