- Evercore ISI says healthcare, staples, and energy stocks are set up for outperformance in 2023.
- Strategist Julian Emanuel says investors should make sure they’re allocated to value stocks.
- He highlighted some names that are underperforming in spite of rising earnings estimates.
January has been a solid month for stocks, with the benchmark S&P 500 up about 5% after a painful year and the small-cap Russell 2000 up more than 7%.
The issue, according to Julian Emanuel of Evercore ISI, is that the stocks that are generally doing well right now probably aren’t the stocks that will lead the way for the rest of 2023.
In a recent note, Emanuel wrote that investors have to balance their efforts to benefit from a short-term bounce, which could take the S&P 500 to around 4,100, with “with medium term option convexity hedges (lower low in one or more of the major U.S. Indexes as Recession Signals abound) with long term outperformance of RoW and Value in 2023 and beyond.”
He also wrote that value stocks should deliver better returns than growth in 2023 as elevated interest rates put pressure on stock valuations, and that investors need to maintain their exposure to defensive stocks because of high inflation and the risk of a recession.
Emanuel said one way investors can maximize their chances of success is to buy “misperceived” value stocks that have underperformed recently even though analysts’ earnings forecasts for those companies are rising.
He recommended concentrating on energy, healthcare, and consumer staples companies, as oil supply tensions and the resurgence of China’s economy should boost energy prices, while healthcare and staples stocks do well in stagflationary or recessionary periods.
“EVR ISI Strategy recommends ‘Misperceived Value,’ Russell 1000 stocks from EVR ISI Outperform sectors Consumer Staples, Energy and Healthcare with upward earnings revisions since 9/30 yet have underperformed the S&P 500 since the 10/13 low,” Emanuel wrote.
The following 20 stocks are ranked based on their performance relative to the S&P 500 from those October 13 lows through January 13. The stocks that outperformed would likely have less upside than the stocks that are underperforming in spite of their underappreciated strengths and the positive earnings revisions on Wall Street.