To The Moon

There have been increasing chatters of an earnings recession in 2023, something that hasn’t occurred since COVID-19 blasted corporate results to the ground in 2020.

To be clear, the definition of an earnings recession is a back-to-back decline in earnings. While 4Q22 results are still underway (82% of S&P 500 has reported results), the street is forecasting earnings to have fallen -4.7% from the year-ago period, according to data from Factset.

Earnings recession in 2023 ( S&P 500 earnings growth)

Source: Factset

If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported a YoY decrease in earnings since 3Q20. Negative EPS growth has happened only 4x over the past 23 years, with each year being followed by a “significant” price downside in the market.

Looking ahead, the street expects an earnings decline of -5.4% YoY in 1Q23 and -3.4% YoY in 2Q23. That will fit the definition of an earnings recession.

However, weak earnings seen in 1H23 are expected to swiftly reverse in 2H23, where the street’s current consensus is for earnings to grow by 3.3% and 9.7% in 3Q23 and 4Q23, respectively.

Amid the current tough earnings environment faced by US corporates, has the market already priced that in?

More Pain to Come?

According to analysts from Morgan Stanley (likely the most bearish brokerage on the street), they believe that the market hasn’t priced in an earnings recession yet and that will continue to be a major headwind in 2023.

Historically, the majority of price downside in equities comes after forward EPS growth goes negative. In other words, the current earnings recession is not priced in yet.

I have recently written an article, entitled: 4 Reasons We Are Still in a Bear Market Bounce. One of the reasons pertains to an earnings recession in 2023 that has yet to be priced into the market.

The other reasons are:

1. Increase in consumer debt + decline in savings

2. Unemployment starting to increase as seen from widespread retrenchment in tech firms

3. The persistent inverted yield curve

While it pays to be cautious of the imminent earnings recession that is about to hit us, that should not imply an inaction on the part of investors, or to go all into cash.

Instead, the wiser move would be to prepare a list of stocks that one can capitalize on any price weakness, resulting from an earnings recession-driven market sell-off.   

In this article, I will highlight 17 blue-chip S&P 500 stocks that are potentially undervalued and are prime to “avoid” an earnings recession.

These companies are screened based on their ability to continue growing their earnings amid the current earnings recession in 2023. In addition, they are trading at less than 50% of their historical 5-years Price-Earnings Multiple ranges, which could indicate a level of undervaluation.

The screening criteria are as such:

1. Historical 1-year EPS growth > 0%

2. Current quarter EPS growth > 10%

3. Next quarter EPS growth > 10%

4. Current year EPS growth > 10%

5. Next year EPS growth > 10%

6. 5-Year P/E Range < 50%

We are screening for stocks that are forecasted to grow their EPS in both the current and next quarter (1H23) by a magnitude of 10% YoY, a period where many companies are expected to see weak earnings performance.

In addition, we want to make sure that these blue-chip companies are also forecasted to grow their earnings this year and into the next, by a magnitude of 10% as well.

Lastly, they have to be trading at < 50% of their historical P/E multiples.

There are a total of 17 companies in the S&P 500 that meet these rather stringent criteria. These are potentially undervalued stocks that can weather an earnings recession in 2023.

17 Blue Chip Undervalued Stocks That Can Weather an Earnings Recession in 2023

The table below shows the 17 blue chip stocks that meet the stringent screening criteria I set in place. 

Earnings recession in 2023 (17 companies that can weather an earnings recession)

Source: Stock Rover

Do note that these companies are also trading 50% below their 5-year historical P/E range.

An investor should be monitoring these stocks for any potential price weakness as a result of the “earnings recession” driven market sell-off and dare to capitalize when “blood is everywhere on the street”.

The largest market cap counter in the list is ServiceNow – NOW ($89bn) while the smallest market cap counter is Juniper Networks – JNPR ($10.2bn).  

@Tigerstars

@CaptainTiger

@MillionaireTiger