Just two months into the year, and 2023 has already brought its own flavor of rip-roaring rallies and steep sell-offs.
The stock market can do just about anything in the short term. So following a business and its developments rather than the day-to-day price action of a stock is a far better use of time and energy.
Published on Feb. 25, Warren Buffett’s 2022 letter to Berkshire Hathaway (BRK.A 0.94%) (BRK.B 1.03%) shareholders touched on the topic of inefficient markets and provided a refreshing reminder to focus on the big picture. To quote the shareholder letter:
It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
The prices of top stocks like Albemarle (ALB -0.90%), Taiwan Semiconductor Manufacturing (TSM 0.69%), Netflix (NFLX -0.51%), NextEra Energy (NEE 3.35%), and Axsome Therapeutics (AXSM -2.35%) have come down over the last year. In fact, these five stocks are down between 22% and 54% from their all-time highs. Here’s why each stock is worth considering now.
Take advantage of the dip to bet on a megatrend
Neha Chamaria (Albemarle): Lithium prices have crashed in recent months and are hovering around one-year lows as of this writing. With supply catching up and fears of decelerating demand for electric vehicles (EVs) looming large, some industry experts expect lithium prices to fall further. It’s not surprising, therefore, that lithium stocks have come under selling pressure.
Yet, cyclicality is inherent in the commodity markets, and if you look at the bigger picture, lithium will likely be in huge demand in the coming years as EVs take over gas-guzzling vehicles. Lithium-ion batteries are also key components in consumer electronics and solar backup storage, among other things. Mining is also not an easy business, and companies with experience and discipline should continue to grow. Albemarle is a proven lithium play that has seen its share price fall in recent weeks. It’s also perhaps the best lithium stock you could buy today.
Albemarle had a stellar 2022, with its sales more than doubling to $7.3 billion driven by lithium (Albemarle also sells bromine and catalysts). It’s true that Albemarle sees growth slowing in 2023. Yet, it still expects sales to grow by 55% to 75% this year, which is nothing to sneeze at. By 2027, Albemarle believes its sales could more than triple off if 2022 base on 20% to 30% compound annual growth in lithium sales volumes.
That volume growth may sound ambitious, but anything even close to double-digit growth is enormous for the mining industry. Albemarle is spending billions of dollars on capacity expansion and is also looking beyond mining to exploit the lithium boom, all of which represent huge growth opportunities for the company and could significantly boost its cash flows. And with cash flows, Albemarle could also pay out bigger dividends — the stock has increased dividends every year for 29 consecutive years now.
Is Taiwan Semi a contrarian pick or just a smart choice?
Anders Bylund (Taiwan Semiconductor): I know what you’re thinking. Master investor Warren Buffett’s Berkshire Hathaway recently bought some stock in Taiwan Semiconductor Manufacturing and then sold most of it just a few weeks later. If the Oracle of Omaha is shying away from the chip-making colossus, something must be wrong. Isn’t it a mistake to get into a stock while the smartest of the smart money is heaving it out the window?
I’m absolutely not trying to say that we mortal investors should do the opposite of what Warren Buffett is doing. That would be a quick path to an empty wallet. My Taiwan Semi recommendation is not a contrarian play on Buffett’s trades.
But what’s best for Berkshire Hathaway and its bottomless pockets is not necessarily the right choice for you and me.
Buffett’s investor team sees a capital-intensive business struggling to meet Wall Street’s revenue targets. The company also plans to invest at least $32 billion in manufacturing infrastructure this year. On further review, TSMC’s business plan doesn’t look like a great fit for Buffett’s investing style.
I see something else in Taiwan Semi. The stock is down more than 25% over the last year, and now trades at just 14 times trailing earnings. Meanwhile, this company is nearly guaranteed to sell out its manufacturing capacity as the semiconductor industry continues to struggle with a long-running shortage of production capacity. Those massive equipment investments will let the company serve more customers while putting up a fight against an ambitious Intel and other chip manufacturing rivals with high-end technology platforms.
Long story short, building microchips will never go out of style, and Taiwan Semi is a master of that craft. I’m thrilled to see this top-shelf company’s stock available at bargain-bin prices, and might just pick up a few shares for myself while the stock is this affordable.
A new chapter for the streaming giant
Trevor Jennewine (Netflix): Many investors gave up on Netflix last year. The streaming giant lost subscribers in the first and second quarters, and it reported underwhelming financial results as password sharing and unfavorable foreign exchange rates created additional headwinds to growth. Revenue rose just 6% to $31.6 billion in 2022, a material deceleration from 19% growth in 2021. But the future looks brighter for two reasons.
First, Netflix plans to crack down on password sharing this year. The company recently debuted its paid-sharing product in Canada, New Zealand, Portugal, and Spain, and a broader launch is planned in the coming months. Netflix will likely see a small backlash in the form of higher churn. Still, the impact should be temporary, and it’s the right decision for the business. Management estimates that more than 100 million households currently access content without paying, and monetizing even a fraction of those viewers would have a material impact.
Second, Netflix launched an ad-supported streaming plan in November, and the early results are promising. The company added 7.6 million subscribers in the fourth quarter, up from 2.4 million subscribers in the third quarter, and management says the take rate falls between its basic and premium plans. Better yet, the decision to lean into ad-supported streaming content means Netflix now has a much larger addressable market. According to Omdia, consumers will spend $118 billion on subscription video plans by 2027, but brands will spend $362 billion on online video advertising by that time.
On that note, Netflix is perfectly positioned to benefit from the growing popularity of streaming entertainment. The company leads the industry in engagement, revenue, and profit, and it possesses an unrivaled ability to churn out binge-worthy content. In fact, Netflix accounted for 13 of the top 15 original streaming series in 2022, as measured by viewing time.
Currently, shares trade at 4.6 times sales, a discount to the three-year average of 7.4 times sales. That’s why this growth stock is worth buying.
NextEra Energy’s investments set the stage for decades of dividend growth
Daniel Foelber (NextEra Energy): Income and utility investors alike may recognize NextEra Energy given it is the largest U.S. utility by market cap, and it continues to make headlines for its renewable energy endeavors. NextEra Energy deserves a lot of credit for being an early adopter of massive utility-scale investments. It launched its first wind farm in 1998. Fast-forward to today, and many of its peers are following in the same direction with their own multibillion-dollar renewable energy projects.
Regulated electric utilities don’t compete in the same way as other industries. For the most part, each company has a solidified position in a given geography and works with government agencies to set reasonable prices for customers. However, NextEra Energy is a little more complicated because it has a massive division known as NextEra Energy Resources that invests in projects across North America instead of just in NextEra’s backyard in Florida.
The difference between NextEra Energy and other utilities is that it has a proven track record of financing and developing renewable energy projects. The company has demonstrated its ability to steadily grow earnings and its dividend. And given the lifespan of its investments and the long-term growth of the energy transition, NextEra Energy is in an excellent position to keep growing profits and its payout for decades to come.
Retiring existing infrastructure and building lower-emission forms of power generation is a costly endeavor. But for investors who believe in decarbonization, NextEra Energy’s proven track record, prowess, 2.5% dividend yield, and massive head start make it the best utility stock to buy now.
Key catalysts ahead
Keith Speights (Axsome Therapeutics): There’s a lot to look forward to this year for Axsome Therapeutics. From a financial standpoint, the continued U.S. rollout of Auvelity in treating major depressive disorder stands at the top of the list. The drug raked in $5.2 million in the fourth quarter after launching on Oct. 19, 2022. Sales should accelerate sharply this year. Axsome stated in the company’s fourth-quarter conference call that progress is being made on expanding reimbursement for Auvelity, with major formulary decisions expected over the next six months.
Axsome should also get a boost from Sunosi in 2023. The company acquired the ex-U.S. commercialization rights to the sleep-disorder drug in Q4. It recently licensed marketing rights for Europe and parts of the Middle East and North Africa to Pharmanovia.
But the biggest catalysts for Axsome in the near term could come from its pipeline. Axsome expects to submit filings for U.S. approvals of two candidates in 2023 — AXS-07 in treating migraine and AXS-14 in treating fibromyalgia. The company also plans to announce results from a pivotal late-stage study of AXS-12 in treating narcolepsy in the first half of this year.
Auvelity has the potential to generate peak annual sales of $1.8 billion, based on analysts’ projections. When the opportunities for Sunosi, AXS-07, AXS-14, and AXS-12 are added in, Axsome’s market cap of only $2.8 billion looks very attractive.