Shares to Watch in 2023: Identifying High-Potential Stocks

What are the greatest stocks and shares to invest in this coming 2023? With a recession on the horizon, it makes sense to invest in defensive equities such as those in the cigarette, defense, and pharmaceutical industries. However, interest rates are likely to begin falling gradually next year, while inflation, which is now near 40-year highs, is forecast to moderate. As a result, our stock selection of the best stocks to invest on in 2023 includes a combination of defensive and recovery prospects. So, what are the finest stocks to consider and keep an eye on in 2023?

M&G

Shares fell 17% following Kwasi Kwarteng‘s mini-budget due to the depreciation of the pound and interest rate hikes, as well as consequent liquidity issues. The stock has since recovered some ground, but it is still down 5% year on year at 187.7p.

With an aging population, the corporation is well-positioned for the future. In August, M&G reported strong half-year results, with operating cash generation increasing 40% to £433 million, and its shareholder Solvency II ratio standing at 214% (198% last year).

The asset manager wants to produce £2.5 billion in operating capital by the end of 2024, and it has also initiated a £500 million share buyback program.

Meanwhile, with a dividend yield of 9.9%, the shares are appealing to income investors. Deutsche Bank Aktiengesellschaft analysts recently reduced their price estimate for the shares to 195p from 200p. However, there is still some room for growth.

Babcock

Unfortunately, the Ukrainian conflict continues, as do tensions between the United States and China over Taiwan. With Western nations increasing their defense budget, Babcock might be an appealing investment. The international defense contractor, which is one of our top stocks to purchase right now in the UK, recently returned to profitability. It has a £9.9 billion order backlog, with 90% of 2023 revenues under contract, including important contracts with the Royal Navy and the Ministry of Defence.

The company’s management believes it will gain from the increasing demand for military training as a result of the situation in Ukraine. The shares have not performed as well as other defense businesses this year, such as BAE Systems, which is up 30%, and are down 5% this year to 281.8p. Nonetheless, while JP Morgan Chase analysts recently reduced their price objective on the company from 510p to 475p, they believe the shares might touch 475p.

GlaxoSmithKline

Because consumers require medications regardless of the economic climate, the pharmaceuticals sector has always represented a safe harbor in a storm.

GlaxoSmithKline has not had the tremendous return of its partner AstraZeneca this year, with shares up 37% over 2022, but it still has some appeal. GSK’s stock is down 6% year to date, to 1510.6p. They recently gained a lift, however, after a US judge dismissed 2,500 complaints against the pharmaceutical company, alleging that its heartburn medicine Zantac caused cancer. Morgan Stanley analysts projected that compensation claims might have reached $45 billion. This decision should clear up a key doubt about the shares.

Meanwhile, GSK spun off its healthcare unit Haleon in July, and Momelotinib, the company’s myelofibrosis therapy, was just filed to US regulators. After currency fluctuations, third-quarter revenue increased by 9% to £7.8 billion, supported by sales of specialty pharmaceuticals. The pharmaceutical major raised its full-year earnings outlook to an 8% to 10% increase in revenues at constant exchange rates and a 15% to 17% increase in adjusted operating profit. JP Morgan Chase analysts have put a price target of 1600p on the shares.

Imperial Brands Tobacco stocks are not for everyone, especially ESG-conscious investors, but income investors will like Imperial’s 6.7% dividend yield. Imperial Brands generates a lot of money, therefore the company just started a £1 billion share buyback program.

 

The Imperial Brands

Imperial is also enjoying strong growth in vaping products, particularly in continental Europe, and is increasing its market share in combustible (conventional tobacco) products.

To be sure, the company’s shares have already risen 34% this year to 2,111p, owing to investors’ rush to defensive equities and diminished appetite for risk. However, given Imperial’s £1 billion share buyback program and the potential for growth in vaping, the shares are still worth monitoring. Analysts at Royal Bank of Canada believe they might hit 2350p, while those at Barclays believe they will reach 2500p.

EasyJet

EasyJet shares are down 30% this year to 388p after capacity difficulties in the airline industry slowed the company’s recovery from the Covid-19 crisis. Following summer travel delays, the carrier’s stock price suffered this year.

Easyjet, on the other hand, recently reported much lower losses and its greatest summer revenue performance yet. The airline reported its highest-ever earnings for a single quarter, with EBITDAR (earnings before interest, tax, depreciation, amortization, and restructuring) of £674 million, while Easyjet Holidays approached its £100 million revenue target and the load ratio rose to 92%.

While the firm anticipates a 50% increase in fuel expenses in the first half of 2023, Easyjet is hedged for 74% of this at an average price of $814 per metric tonne – significantly below the current market price of $1,000 per tonne.

Chief executive Johan Lundgren believes the company “works well in terrible times,” and that with the cost of the living problem, customers would flock to Easyjet to enjoy a low-priced vacation. Analysts at Sanford C Bernstein believe the stock might hit 700 pence. The company may benefit as Covid’s travel concerns fade.

Tesla

Tesla shares have fallen 46% this year to $182.45, according to Elon Musk, the CEO of the electric car manufacturer. This is due to a combination of investor flight from technology equities and concerns that Musk has been distracted by his protracted purchase of Twitter.

However, Tesla shares, which have a price-earnings ratio of roughly 50, could be a rebound option. Teslas are becoming increasingly common on European streets. This is due to the company’s new gigafactory in Berlin, which can produce 1,000 cars every week.

Indeed, the corporation produced 365,000 automobiles and shipped over 343,000 in the third quarter. Total sales jumped 56% to $21.5 billion (from $13.8 billion in 2021), while net income more than doubled to $3.3 billion and free cash flow increased 148% to $3.3 billion in the quarter. Tesla is now generating so many vehicles that it is having difficulty transporting them due to logistical constraints. Morgan Stanley analysts have set a price target of $330 on the stock.

Microsoft

Microsoft stock has dropped 25% this year to $275 in the general tech stock panic, and present levels appear to be a buying opportunity. The company believes even amid difficult economic times it is helping clients “do more with less” and asserts that digital technology is the “ultimate tailwind”. Certainly, some fund managers believe that more established technology companies provide defensive features, and as a result, the IT behemoth continues to perform well. Revenue in the first quarter increased 11% to $50 billion, while revenue from Microsoft Cloud increased 24% to $25 billion. However, net income declined by 14% as Windows OEM revenue plummeted by 15%.

The corporation has agreed to buy gaming company Activision Blizzard, and the deal is being scrutinized by regulators in several countries, including the United Kingdom, due to competition concerns. Microsoft also returned $9.7 billion to shareholders last year. UBS analysts believe the stock might hit $300.

Taylor Wimpey’s

Shares in the housebuilder have fallen 37% this year to 104p on predictions that the UK property market could collapse next year. Rising interest rates and the likelihood of a recession next year have caused the property market to stagnate this autumn. Savills, an estate agency, predicts a 5% to 10% drop in house values in 2023. Taylor Wimpey, on the other hand, maintained its earnings guidance for the full year in its most recent trading statement, indicating that it may show resilience.

While increased mortgage rates are affecting demand, the company claims it is still seeing strong levels of the client interest. Taylor Wimpey’s order book stood at roughly £2.6 billion in November (£2.8 billion in 2021).

However, the housing market will rebound in the long run. Interest rates are likely to fall, and demand for housing continues to outweigh supply, though this could alter if large-scale mortgage defaults occur. Taylor Wimpey is thus a long-term investment.

Tesco

Things aren’t going well in the retail industry right now. The cost of the living problem, along with widespread cost input inflation and rising salaries, is slamming corporations in the wallet. As their energy expenses rise, consumers are counting pennies. Tesco, on the other hand, appears to be well-positioned to withstand the approaching storm. True, the company has warned investors that profits this year will be weaker, coming in at the low end of projections.

It now anticipates full-year retail adjusted operating profits of between £2.4 billion and £2.5 billion. Nonetheless, cash flow is expected to be at least £1.8 billion, while Tesco has cut costs by £500 million and launched a £450 million share repurchase program.

This year, the company’s stock has dropped 18% to 230p. Given Tesco’s successful club card plan and discount ranges, this could be a long-term buying opportunity.

PayPal

PayPal shares are down 60% this year to $72.23 as investors continue to flee tech firms. Earlier this year, activist investor Elliott Management purchased a $2 billion investment in the company, which specializes in online payment technology, and convinced it to refund up to $15 billion to shareholders. Recent third-quarter results were strong, with net revenues increasing 11% to $6.9 billion and free cash flow increasing 37% to $1.8 billion.

In the meantime, overall payment volume rose by 9% to $337 billion. PayPal also increased its full-year earnings forecast. While the stock has been dragged down by unfavorable sentiment surrounding reduced revenue guidance, the company has lifted its profit guidance to GAAP EPS of roughly $2.11 to $2.13. An investor day scheduled for early next year could offer news flow for the shares.

Following the third-quarter results, Goldman Sachs analysts reduced their price objective for the stock from $127 to $110. However, this implies a potential upside of more than 40%. While the cost of living crisis may have a short-term impact on profitability, PayPal controls the online payment sector, and this appears to be a good entry moment for investors.

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