Jefferies analyst says these 3 stocks will be resilient to the coming recession

Cheap stocks with uncertain balance sheets are doing well in the 2023 stock rally thanks to investor optimism about the market and economic conditions. However, the DeSanctis analyst recommends looking for companies with stronger balance sheets and those that will benefit from a healthier global economy, especially those with a larger share of sales outside the U.S.

Steven DeSanctis

One of the surprising elements of the 2023 stock rally is that cheap stocks with relatively shaky balance sheets are doing great. It's the kind of thing that usually happens when investors are more optimistic about the market and economic conditions. The fact that the rally started in January, when assets that had lagged the previous year usually saw at least a modest pullback, was also a factor.

"The cheapest stocks tend to carry the highest levels of debt, so if we are right and weaker balance sheet companies start to underperform, valuations won't be as effective a factor going forward."

So DeSanctis doesn't think buying cheap stocks will be a path to good returns. What could work better? DeSanctis suggests going in the opposite direction and looking at companies with stronger balance sheets, as wider credit spreads will be an obstacle for companies with more debt.

Another way is to look for companies that will benefit from a healthier global economy. As the Chinese government has lifted some of its strict anti-poverty policies and experts are more optimistic about Europe's economic trajectory, DeSanctis says it makes sense to find companies that earn more from their sales outside the U.S.

He also focuses on companies whose stock performance is inversely proportional to the performance of the U.S. dollar, meaning they tend to rise when the dollar weakens and tend to fall when it strengthens.

The U.S. dollar has weakened sharply in the past three months and is far from its highs of September and October. That's good for companies that make a larger share of their sales abroad because their profits grow when they are converted from foreign currencies to U.S. dollars.

So these are his picks for 3 stocks:

Marvell Technology $MRVL-1.8%

Sector.

Percentage of foreign sales: 89%

Marvell Technology is an American company based in California that develops and manufactures semiconductors and related technologies. It was founded in 1995 and as of 2021 had more than 6,000 employees, over 10,000 patents worldwide, and annual sales of $4.5 billion.

For the fourth quarter of fiscal year 2022 (end of January), the company reported net sales of $1.343 billion, up 68% from the same period the previous year. Net income per share was $0.01 on a GAAP basis and $0.50 on a non-GAAP basis.

For the first quarter of fiscal year 2023 (end of April), the company expects net sales of approximately $1.375 billion with a range of plus or minus $50 million. It also expects non-GAAP gross margin of approximately 65% with a range of plus or minus half a percentage point.

Visteon $VC+1.8%

Percentage of international sales: 80%

Visteon is a global supplier of automotive electronics and connected vehicle solutions. It was founded in 2000 as a spin-off of Ford Motor Company. In 2021, it had approximately 10,000 employees and annual sales of $3.146 billion.

For the full year 2022, the company reported net sales of $3.756 billion, up 35% from the previous year. Net income attributable to Visteon was $124 million.

For 2023, the company expects net sales of $4.1 billion with a margin of plus or minus $100 million. It also expects gross margin and earnings per share growth on a non-GAAP basis.

Viatris $VTRS+2.0%

Sector.

Percentage of international sales: 77%

Viatris is a global pharmaceutical and healthcare company headquartered in Canonsburg, Pennsylvania. It was formed through the merger of Mylan and Upjohn, formerly a division of Pfizer, in November 2020. It offers drugs for various therapeutic areas and applications, including cardiovascular, oncology, women's health, diabetes, respiratory and other diseases.

For the full year 2022, the company reported net sales of $11 billion with a 7% growth from the previous year. Net income was $1 billion or $0.86 per share.

For 2023, the company expects net sales of $11.5 billion with a range of plus or minus $300 million. It also expects growth in adjusted EBITDA and adjusted earnings per share on a non-GAAP basis.

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Please note that this is not financial advice. Every investment must go through a thorough analysis.


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