Andrew Bary’s Top Stocks for 2023

But I think Silicon Valley's view now is that, you know, tech companies have gotten too complacent and too fat, and that Alphabet's margin should be a good deal higher given the, given the growth they've experienced and given the, you know, the quality of the business.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Barron's associate editor and my pal Andrew Barry. Each year at this time, Andrew puts together a cover story highlighting 10 stock picks for the year ahead. I want to talk with him about some of the picks and how he chose them, where the stock market and house prices and inflation are headed. Listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. Is there any business that we have that we should get to before we jump into my conversation with Andrew? Not unless you have something. You know, I have things maybe for future episodes. I feel like the finance world was abuzz this past week over that crypto entrepreneur Sam Bankman-Fried and his indictment and his frizzy hair. And there was a lot of talk about Elon Musk selling more stock. And then, of course, former President Donald Trump's announcement that he had a major announcement. And then that announcement turned out to be the launch of $99 digital trading cards with his head superimposed on the body of a race car driver. There was an astronaut, fighter pilot. One of them might have been an Old West sheriff. I don't want to minimize the newsworthiness of all of these items, but can we just note for the record that we also learned this past week that U.S. researchers produced power from nuclear fusion for the first time in history? And Moderna announced quite positive results in a trial for a vaccine for preventing melanoma relapse. So I don't know, we might have unlocked future ways to create unlimited clean energy by mimicking the sun and to take shots to not get cancer. Those sound like things we should probably follow up on. The fusion and cancer shot things more so than the frizzy hair guy and the digital superhero cards. What do you think, Jackson? Jackson? Yeah, I'm looking at these Trump cards online. There's one with a rocket ship and the Dow going up. That sounds bullish. Now let's play my call with Andrew. It's that most wonderful time of the year when you pick 10 stocks that people should favor for the year ahead. Everyone's excited. What happened with last year's list?

We're basically about 10 percentage points ahead of the S&P 500. So we did okay.

Hold on, don't just blow right past that. Hang on there. When it's that much, Andrew, you really trumpet the numbers. You go quickly if the numbers aren't good. 10 percentage points ahead of the S&P 500 in last year's list. What did well for you? What shined last year?

Well, we had a number of winners. IBM did well, which was a surprise winner. Shell did well. Yeah, I mean, you had like AT&T did okay for us. Berkshire was up, J&J. Those are some of the winners. The biggest winners were Shell and IBM.

What does the market look like to you from here? If somebody just dropped off a dump truck full of cash in my front yard, is this a good time to take all of it and put it into the stock market?

Yeah, I think so. I think it's a good time to invest. The Fed seems to be on the verge of a pivot. Powell may be talking tough today, but I think you have to watch what they do, not what they say, and maybe not what they do, but You know what they— what they're likely to— I think the Fed has no stomach for keeping rates high for any extended period of time as the economy weakens. And I think that's what the stock market is telling you right now. There may be some weakness in the— for maybe the first half of the year, but I think the stock market's looking ahead to what could be a better second half and a better '24 with lower inflation, lower interest rates. And it could be— I mean, maybe not off to the races for stocks in 2023, but I think the odds are good year for stocks in 2023.

Now, how does that inform your stock picking? I mean, what did the world look like to you at this time last year? You know, certainly it would've been tough to predict anything like the year that we had, but are you approaching things any differently?

Well, I was more defensive coming into this year. And so I think I picked stocks which were more defensive. Whether or not these are offensive stocks for this year, I mean, I try to have a diversified group of stocks. I mean, I'm not going to pick like 8 tech stocks and like 2 others. I try to have a diversified group. I mean, so that it's somewhat representative of the market, even though in 10 stocks you can't be entirely representative of the market. But I like to have some varieties because I think, you know, I mean, that makes sense. There's no energy stock on the list because I think energy stocks are pricey right now. And so, but I think the banks look very good. Bank of America is one of the top picks.

Okay, so Bank of America, big. That's— let me start there. That's all I've got. It's big. Is it big and boring? I wouldn't call them boring. It's a fine company. But it— but is it the, you know, is it the one that's going to move the most? I mean, you're starting off pretty big there.

It's arguably one of the best managed big banks in the country with one of the best CEOs in Brian Moynihan. The stock is down—

one of our top CEOs on the Barron's list. Go ahead.

Yeah, I mean, kind of a— he was underrated. Now he's kind of being, I think, more recognized for the job he's done. And I think the stock is down 25% this year and they already have the best loan portfolio, the highest quality loan portfolio among their peers. Their mantra has been what they call responsible growth. They basically kind of lend primarily to their customers and it's trading for about 10 times earnings, nearly a 3% dividend yield. And I think the risk-reward looks very good on that stock right now.

Why do you choose them over the other Goliath, JPMorgan?

You know what? I think, I mean, there's more investment banking and trading in JPMorgan. Bank of America is a little bit cheaper and for a consumer-focused bank, maybe a good place to be. I mean, it's something where it's 6 of one, half dozen of the other. I mean, you can make a case for JPMorgan as well.

Do the higher rates, do we stay at some higher level of interest rates that makes the just traditional consumer lending more profitable?

Yeah, I mean, I mean, I mean, the negatives are that you could have a recession. I think you're seeing some slowdown in consumer spending and people are worried about the impact of a recession on the banks. And I think they are very well positioned. They have a very strong balance sheet. They have a huge low-cost deposit base. And not a lot of that is being recognized right now in the stock.

Risk-averse, fair to say?

Yeah, it's a risk-averse bank. I mean, they basically try to keep their loan portfolio in basically in as pristine a condition as possible, even though they, of course, are lending money. So there is some risk.

Let's talk about Comcast. Show business, there's a lot of volatility in the stocks. I take it that you're picking this one for the wires and not the show business. Is that right?

Yeah, I'm picking it for the broadband business. And the reason why the stock is down this year, it's down about 20% with the group, is that the broadband business growth is slowing. That is their best business. There's also cord cutting going on. And so those are the concerns. But it's a, it's an inexpensive stock around 10 times earnings. 3% dividend yield, returning about 10% of its market cap in cash to shareholders via buybacks and dividends. And I think the broadband business is sticky and has pricing power, and you could have activist pressure on the company to break it up and to basically sell or spin off NBCUniversal where, where, where the Peacock business is. Wall Street basically hates the Peacock business. They think it's subscale. They're losing $2 billion plus a year on it. Brian Roberts is not super popular among the, among investors. He's the CEO and the family controls it through super voting stock. He's been reluctant to basically create pure play companies, but the pressure could rise on Roberts even though you can't force him to do something. You may embarrass him and potentially like with Alphabet now, you have, there's an activist involved in Alphabet. You can't really force Alphabet, but there could be some potential changes at Comcast this year.

You told me on the Barron's TV show the other day that you spent $400 a month on streaming and various TV entertainment. First of all, it's time for an intervention. I'm going to plan one for you at the office. We got it. We got to talk about that, Bill. Are you a paying Peacock subscriber?

No, that is the one, one I will not pay for. I refuse to pay for Peacock. I just don't think there's anything worthwhile on Peacock.

Let me just pause there, everyone. This is Regular Jack, not Phone Call with Andrew Jack. Andrew's pretty negative on Peacock just now, and, and I want to say that I look at Peacock for the Saturday Night Live reruns. You know, after I miss it on the weekend, I catch up on it there. Also, I'm two-thirds of the way through Pitch Perfect 2. It's an a cappella movie. You don't have to have seen Pitch Perfect 1 to enjoy it, but I feel like it's helping me with the continuity. Okay, back to the call after this quick break. Now tell me about— we're going to have to diagram this one on the wall. We're going to need the strings and the thumbtacks and the pictures. Explain to me MSG. I've got a hard time getting my head around the pieces of this business. How does it work? What's at stake? What drives this thing? Lay out the business for us.

MSG owns the two teams, the New York Knicks and the New York Rangers. Those are two of the most valuable teams in the NBA, the NHL. Those teams are worth, according to Forbes, about $8 billion. The stock's market value is $4 billion. So you're effectively getting it for 50% off. The question is why? The reason is that it's controlled by the Dolan family. The Dolan family is uninterested in selling the teams. Or the company. That's, that's the reason for the discount. But to me, the discount seems too steep. You could have some catalyst that could happen. You could have a potential partial interest of a sale in the team. They're returning more cash to shareholders. The Dolans control this through super-voting stock, and the key man is Jim Dolan, who is not widely liked by New York Knicks fans given how well the team has done. Not super well liked in general. And he's basically then the, I think, the impediment to basically a sale of the team. And I wonder whether as time goes on, whether that's going to change. And it's It's important to note Manchester United stock was up 50% when the management indicated they were interested in selling the team. That's what can happen. The problem with a company like MSG is that you may not realize full value unless the team is sold or the teams are sold. I mean, that's the negative. But the positive, you're buying it for about half off.

And what is the broader empire here for the Dolans?

The Dolans control 3 companies. They control MSG Sports, which is— they own the Knicks and Rangers. They own MSG Entertainment. Which owns Madison Square Garden, the cable network that carries Knicks and Rangers games, and they're building this, the Sphere in Las Vegas, which is a giant concert arena, $2 billion concert arena in Vegas, which is due to open in the next year or so. They also control AMC Networks, not to be confused with the theater company. This is the entertainment company, the cable network. So those are the 3 companies that they control.

They control AMC, the TV business, not the theater business.

Right, exactly.

This is why they got two MSGs. First of all, that's confusing. And they got one of the two AMCs.

Right. So that's confusing too.

I think they need just new names on all this stuff. Maybe that might be a start.

I know it creates some confusion among investors and arguably the, the MSG businesses ought to all be together under one roof.

Alphabet. There's one everyone's familiar with and you like it. It's one of your top 10 for the year ahead. What do you like?

The stock is down 30% this year. There's concern about the outlook for search advertising in a weaker economy, but the stock looks inexpensive. It's trading for about 20 times this year's earnings, and that's historically a low multiple. It's still growing and there's pressure on the company to cut costs. There was a letter sent to the company by a prominent UK money manager who said this company is way too fat. Management's got to cut costs. I think their employee base has grown by about 20% this year and has doubled in the last couple of years. So there could be pressure on them to cut costs, which would help investors. They could start paying a dividend, which they should be doing, about 1.5% or 2% in line with the market. And the business just seems to be too inexpensive right now at the current valuation.

What is the most under-monetized part of the business? What has the most potential going forward to make more money than it's making today?

Well, I mean, right now, I mean, they have Waymo, which is self-driving cars, is a leader in that. That basically is losing money. So, there's potential there. YouTube remains a very valuable business. Their cloud business, where they're basically behind Microsoft and Amazon, is basically losing money. So, there could be a turn in profitability there. There are entire parts of Alphabet, which basically either lose money or make no money. And so, that actually depresses earnings and kind of makes the price-earnings ratio appear higher than it is. Because if you strip them out, you basically have a a core business which is much more profitable. I mean, they could consider breaking this thing up, but I mean, they won't do that. But the parts are worth, I think, considerably more than the whole.

You describe the company as too fat, or you say an investor describes them that way. That's not how people typically think of these big tech companies. I mean, for years these were the best performers out there, and it just went without saying that whatever they're doing must be the best thing to do because look at the stock performance, it speaks for itself. Is this going on across Big tech now, people are taking a second look across, across the whole tech world.

You're seeing pressure on costs. I mean, Meta is cutting costs. Alphabet and Amazon are basically cutting costs. And, you know, the guy who's setting the tone for this is Elon Musk, who's basically cut— what is it, 75% of the staff at Twitter? That's extreme. But I think Silicon Valley's view now is that, you know, tech companies have gotten too complacent and too fat over the years, and that Alphabet's margin should be a good deal higher given the growth they've experienced and given the the quality of the business, the costs are basically too high and been rising too quickly. And I think that there's a whole new attitude now in Silicon Valley about costs.

Let's move to Toll Brothers. That's one of your picks. Do you think that US house prices are going to rise or fall in 2023? And when I say US house prices, I mean my house.

I think your house could be down 5% in 2023. I don't think it's gonna be a big decline. I think there's still a shortage of homes. I think there's still, I think, a pretty good supply-demand situation. But I think Toll, what's interesting about Toll is that while housing may be weakish, I think the high end of the market is more insulated than the entry-level market because affluent people can either pay cash or afford a higher rate mortgage. They're often selling homes where they have equity. So, I think they have more financial flexibility than lower-end buyers. But the average Toll home costs $1 million against about $400,000. For the typical entry-level home that Lennar and D.R. Horton, which the industry leaders are building. So, and the stock is pretty reasonable. I mean, analysts don't think that earnings are going to fall off a cliff in 2023. In fact, they see pretty robust earnings. I mean, Toll is basically offering more incentives. They're basically offering about an 8% incentive right now off the price of homes to kind of move them, which isn't really compared to what they were doing before when they were offering a couple of percent is not a big concession. I mean, the risk is that you basically have a terrible spring selling season. And that's the risk for Toll. But the stock now is trading for about 6 times earnings below book value. And I think it could ultimately be a takeover candidate for the industry leaders, Lennar and D.R. Horton. It's the only big differentiated luxury home builder in the country. I think they would like to own this company, particularly D.R. Horton. And I think Berkshire Hathaway would also be a potential buyer of it. The patriarch of the company, one of the co-founders, Bob Toll, died about 2 months ago. So I think, you know, that could make it easier for this company to be sold.

You have to adjust my 5% house price decline for the free firewood I get when trees fall around here. I cut them up. That's, you know, you got to take that off the decline.

What was that, maybe $1,000 or something of wood?

I don't know.

Those trees are a negative. You have to cut them down. You got to prune them and maintain them. That's a negative.

Only ones that fall from storms. Don't let people think I'm cutting down good trees here. I'll get— I'll be in trouble with the neighbors. So if I understand you correctly, because Toll appeals to this higher income, you know, this is well-off buyer, others might be challenged by those higher mortgage rates. Toll has less exposure there.

It's less. I mean, clearly it's going to— it bites and clearly it has some impact, but basically it's less of an impact than on entry-level buyers who are scraping together a down payment and for whom, you know, the almost doubling in mortgage costs between home price appreciation and higher rates is really hurting them. Often people putting up big down payments, 20%, pay cash. So I think it's less of an impact for the total buyer than for the entry-level buyer of homes that are produced by Lennar, D.R. Horton, or others in the industry.

What would you tell someone out there who's been looking for a home and they're thinking about buying one? They're wondering if the time is right or if, you know, what should they do? Should they wait a year? Does it depend greatly where they are? What would you tell someone like that?

You know what? Don't wait. I mean, life is short. People try to time this thing and they basically contort themselves. You know, I would say if you want to buy a home, and you have the money for it, don't wait. That's my view. I mean, my view is you basically, you know, you can, you can get too cute about this. And yeah, things might be better a year or two from now, but they might be worse. And then you basically, you will have not had and enjoyed a new home for the next year or two.

Thank you, Andrew. And thank all of you for listening. You can find all of Andrew's stock picks online at Barrons.com. Jackson Cantrell is our producer. I'm pretty sure he's considering an investment that costs $99. What do you think about this one with laser beam eyes? I think that's quite a variety. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. The podcast will be off for 2 weeks for the holidays. Jackson, are you playing some reruns? I like to call them encore presentations. I bet you do. We'll return with new episodes in the new year. See you then.