After a rough 2022, the S&P 500 has gotten off to a solid start in 2023.
The broad-market index rose 6.2% in January as investors responded bullishly to falling inflation and signs the Federal Reserve would start slowing its interest rate hikes.
So what were the best-performing stocks last month? Let’s take a look at the top three and see if they’re still worth buying today.
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1. Warner Bros. Discovery (up 56%)
Warner Bros. Discovery (WBD 2.90%) shares had a dismal 2022 as AT&T‘s spinoff of Warner Media and merger with Discovery Communications revealed a number of problems with the new media company.
The stock soared to start 2023, though there was no particular news driving the shares higher. Instead, a combination of bullish analyst notes, a strong earnings report from Netflix, hopes for an economic recovery, and an announcement about price hikes all seemed to give shares a boost. The stock rose in each of the first eight sessions of the year.
CFO Gunnar Wiedenfels said at an industry conference that the company is “relaunching and rebuilding” in 2023, distributing some titles and keeping others for its streaming service.
The company also said it would raise the ad-free prices on HBOMax from $14.99 per month to $15.99 per month, as it prepares to launch a combined HBOMax/Discovery streaming service. Financial Times reported the company was considering selling its music library too, which could fetch as much as $1 billion.
Better-than-expected subscriber growth from Netflix in its fourth-quarter earnings report also sent a signal that headwinds in the streaming industry may have abated. Additionally, Warner Bros. Discovery was not the only streaming stock to soar last year. Paramount Global also jumped, a sign investors are rediscovering beaten-down legacy media companies.
Warner Bros. Discovery could continue to move higher, but the business still faces challenges, including nearly $50 billion in debt. Investors may want to see signs the company is approaching generally accepted accounting principles (GAAP) profitability before buying into the turnaround.
2. Tesla (up 41%)
Tesla (TSLA 6.58%), always a battleground stock, overcame a slump at the beginning of the month to post a 41% gain, making it the S&P 500’s second-best-performing stock in January.
Tesla’s stock tumbled at the beginning of the month as the company missed expectations for fourth-quarter deliveries and production. Then, it announced price cuts in the U.S. and China, which seemed to spook the market and added to questions about demand for Tesla vehicles.
The stock nonetheless rose over most of the month, getting tailwinds from the broad-market recovery as investors anticipated a slowdown in interest rate hikes, which favors automakers like Tesla as car demand is highly cyclical.
Then, Tesla’s stock really took off after it reported fourth-quarter earnings as the company beat estimates on the top and bottom lines. The company also said it would produce 1.8 million vehicles this year, which was ahead of its long-term annual production growth target of 50%. CEO Elon Musk defended the company’s price cuts, saying demand for its vehicles was strong and the price cuts were a reflection of improving efficiencies, as well as a way of taking advantage of EV credits in the U.S.
Tesla’s stock is likely to be sensitive to broader market sentiment given its volatility and cyclical nature, but the stock looks well priced if it can continue to ramp up profits. That may be more difficult following the price cuts, but they could also help Tesla retain market share.
A lot could change in the electric vehicle industry this year, but if Tesla can hit its 1.8 million production target and deliver strong operating margins, the stock should finish the year even higher.
3. Western Digital (up 39%)
Western Digital (WDC 3.85%), the maker of data storage devices, including hard disk drives and solid state drives, jumped in January largely due to reports that it’s holding merger talks with Kioxia Holdings, another data storage provider.
That kicked off a rally in the stock through the first week of January as a number of analysts upgraded the stock in the wake of that report.
The stock jumped again on Jan. 23 when Bloomberg reported that merger talks between the two companies were progressing, and the companies are planning a dual-listing structure in the U.S. and Japan. Bloomberg said Western Digital would spin off its flash business and merge it with Kioxia. Western Digital would run the combined company.
At the end of the month, Western Digital turned in a disappointing earnings report as it faces the same headwinds as the semiconductor industry does. Revenue in the quarter fell 36% to $3.1 billion, ahead of estimates at $2.99 billion, and it posted an adjusted loss per share of $0.42, which was much worse than expectations for an adjusted loss of $0.12 per share.
The company cited an inventory glut and falling prices in flash memory drives, which have hammered the company’s results. Guidance for the current quarter called for the situation to get even worse, forecasting an adjusted loss per share of $1.40 to $1.70.
Given the headwinds in the semiconductor industry currently, the buy case for Western Digital only makes sense if it can pull off the merger with Kioxia. In the meantime, the stock could drift lower as it focuses on cost-cutting and streamlining for a lower-demand environment.