2022 was a terrible year for stocks. The S&P 500 has lost 20%, the Dow Jones Industrial Average is down nearly 10% and the tech-heavy Nasdaq Composite plummeted more than 30%. Blame it on raging inflation, a hawkish Federal Reserve, the War in Ukraine or a looming global recession.
Given that the days of just buying the S&P 500 or some other broad index fund to garner double digit returns appear to be in the rearview mirror, experts believe it is now a so-called “stock pickers market.”
With that, Forbes tapped Morningstar to identify top-performing fund managers who have either beat their benchmarks this year or on a longer-term basis over three-year, five-year or ten-year periods. Here are their best stock ideas for the coming year.
*Stock prices and fund returns are as of 12/23/2022
Charles Lemonides
ValueWorks Ltd. Partners Long-Biased: Long-term strategy that finds disparities between a company’s underlying assets and security price.
2022 return: 39.4%, 5-year average annual return: 23.9%
Chord Energy (CHRD)
Market Capitalization: $5.5 billion
12-Month Revenues: $3.2 billion
Lemonides likes Chord Energy, which he calls ideal for a bumpy period in markets as it is a “defensive play with huge cash generation” that is selling at an “exceedingly attractive valuation.” The company owns nearly one million net acres of drilling rights, formed in July after the successful merger of Oasis and Whiting Petroleum. Both had previously spent billions of dollars building resources in the Permian Basin—so during the pandemic, many fund managers like Lemonides bought up the distressed debt in the two companies for cents on the dollar. While Chord Energy currently has a $5.6 billion market cap, both Oasis and Whiting each had valuations far above that at their last peak five years ago, he points out. “Back then oil prices were roughly $80 per barrel, and today they’re basically around that,” Lemonides says, noting the two recently merged enterprises are “producing far more oil today than they were back then.” He also likes the fact that Chord Energy is “very shareholder friendly,” returning the great bulk of its more than $1 billion in free cash flow during the last year and a half to shareholders in the form of stock buybacks or dividends: “That’s cash money in shareholders’ pockets.”
Air Lease (AL)
Market Capitalization: $4.1 billion
12-Month Revenues: $2.3 billion
Lemonides is also a fan of Air Lease, which purchases commercial aircraft and leases them to airline customers worldwide. “The industry has gone through as tumultuous an experience as one can imagine with the pandemic, but Air Lease has basically been financially healthy through the other side of that,” he says. “While some airlines have struggled, the industry seems to be on the mend in a powerful way globally.” Though the company has some debt, with travel rebounding and many planes at capacity, Air Lease is poised to benefit from its pricing flexibility and huge fleet of aircraft. “You’re paying for equity at a $4 billion market cap, but they own roughly $30 billion worth of aircraft that are probably continuing to appreciate in value annually,” even during inflationary environments, Lemonides describes. “Airplanes always went up in value during my experience in the 80’s and 90’s,” he says. At current valuation levels—with shares down 17% in 2022, “it just doesn’t make a lot of sense not to buy.”
James Davolos
Kinetics Small-Cap Opportunities Fund:
Concentrated portfolio of small- to mid-sized growth companies.
2022 return: 34.7%, 5-year average annual return: 21.9%
CACI International (CACI)
Market Capitalization: $7.1 billion
12-Month Revenues: $6.3 billion
A long-time holding which the fund has owned for more than 10 years, Davolos highlights “defense technology” company CACI International, which he thinks covers “all the right niches that are relevant for national security.” Unlike Lockheed Martin or Northrop Grumman, which manufacture missiles and planes, CACI specializes in battlefield communications, encryption and cybersecurity. “Given the modern form of warfare, these areas have much higher secular growth than capital goods-focused defense companies,” Davolos says. “But the market still treats it like a traditional defense contractor, with its fortunes heavily intertwined with defense budgets and the hawkishness of the current administration.” Despite a slowing economy with interest rates staying high, most of CACI’s revenue comes from somewhere within the Department of Defense ecosystem, he describes, adding that government contracts are much less sensitive to inflation or an economic slowdown. Even after rising 9% in 2022, shares of the company “remain cheap on an absolute basis”—especially when compared with more traditional defense contractors with heavy capital expenditures.
Permian Basin Royalty Trust (PBT)
Market Capitalization: $1.1 billion
12-Month Revenues: $42 million
Shares of Permian Basin Royalty Trust, which have risen 116% this year, could be poised for further upside in 2023, according to Davolos. The trust itself is a passive royalty on the Waddell Ranch, the lease on which was bought by a private company Blackbeard Operating just over two years ago. The small-cap operator has made some exciting strides improving old wells by injecting fluid or carbon dioxide—and though relatively cheap per well, those costs have obscured the dividend, leading to a retail selloff in the stock. Once Blackbeard’s capital expenditures taper off, however, “the stock could easily be distributing a dividend of $3 to $4 per share next year,” Davolos predicts. “You’re not just betting on capital expenditures rolling over and higher energy prices—Blakckbeard is also ramping up production in these wells significantly,” which will also pay off, he describes. The fund initiated a position in mid-2020, using the collapse in energy prices brought on by the pandemic as an opportunity to buy up shares on the cheap. “If you underwrite an assumption of higher oil and gas prices next year, which we think is going to happen, the dividend will rerate materially—especially as these new wells come online,” Davolos adds.
Comcast (CMCSA)
Market Capitalization: $153 billion
12-Month Revenues: $121 billion
A longtime and currently top-10 holding of the fund, Comcast may appear to have a mountain of debt—roughly $90 billion at the end of September. “In reality, the company has used these years of low rates to take advantage of reasonably cheap financing,” with a weighted average maturity in 2037 and weighted average coupon of around 3.5%, Brooker describes. “These aren’t particularly scary credit metrics.” He still likes Comcast, shares of which have fallen 32% this year, because of its under-the-radar dividend, which has consistently grown over the past decade and now yields just over 3%. He describes the company as a “durable, sensibly run business” with solid free cash flow, mainly focused on broadband cable but also with elements of diversification with content streaming and theme parks. “Comcast has a high-quality problem—market share is so high that subscriber growth is harder to get, but at the same time pricing can be used as a potential lever, so it really is a double-edged sword.” One potential catalyst to watch for in the next few years: Comcast’s roughly 33% stake in Hulu, which has an upcoming put option allowing the company to sell to Disney. “At a minimum total valuation of around $27 billion for Hulu, that could result in roughly $9 billion for Comcast,” Brooker points out.
Thomas Huber
T. Rowe Price Dividend Growth Fund: Blend of large-cap companies with a focus on dividend growers.
2022 return: -11.2%, 10-year average annual return: 12.6%
Becton Dickinson (BDX BDX +0.2%)
Market Capitalization: $71.5 billion
12-Month Revenues: $19.4 billion
Huber likes BD, which he calls a “good defensive growth company” that has reasonable earnings visibility. The fund has owned the stock for a number of years, but it has struggled with disappointing margins and an FDA recall on its Alaris infusion pump last year. Still, “the worst is behind it,” says Huber, who points out that the company has “gotten its act together” with good new product flow, a healthy cost management program, some small M&A deals and steadily improving margins. The relaunch of BD’s Alaris pump is still a wild card and probably won’t happen until at least 2024, but that has helped boost sentiment, he describes. “There is good money to be made in companies as they improve and come out of a troubled period, whether it is self-inflicted or market driven,” Huber says. What’s more, while BD’s dividend yield of around 1.5% is by no means huge, it is raising it steadily over time, which is “a sign of a healthy, consistently growing business,” he adds. “All of that is important in a world where rates are rising and growth is slowing.”
Philip Morris International (PM)
Market Capitalization: $156 billion
12-Month Revenues: $31.7 billion
A holding of the fund since 2008, Philip Morris International is a “stock where you’re paid to wait” thanks to a 5% dividend yield, according to Huber. He thinks the tobacco company is “nicely set up as we go into next year;” While Philip Morris took a hit from the strong U.S. dollar earlier in 2022, the currency has since weakened, which could be a big headwind abating, Huber says. He is a big fan of the main product, the iQOS, a device, which uses heat rather than burn technology to consume tobacco. In addition to being a healthier alternative to regular cigarettes, the reduced risk product (RRP) category has higher margins than the core traditional tobacco business. “Philip Morris has invested heavily—roughly $9 billion in this category—and is now well ahead of the competition,” Huber says, adding that the company boasts “an enormous first-mover advantage.” It recently acquired Swedish Match, a smaller, multinational tobacco company that crucially gives Philip Morris a distribution line for iQOS in the United States. While former parent Altria doesn’t want to cannibalize its own tobacco business domestically, Philip Morris paid several billion to break the existing agreement between the two companies, now paving the way for a launch in U.S. markets that could be as soon as 2023 or 2024, Huber describes. “That obviously has positive implications for the company and the stock.”
