There is no question that large-cap stocks are the winners in 2023 thus far.
The S&P 500 is up more than 14% year-to-date. This compares with a 6.4% gain for mid-cap stocks via the S&P MidCap 400 and 3.4% for small-cap stocks and the S&P SmallCap 600.
Of the 503 stocks in the S&P 500, four have managed to double in 2023: Nvidia (NASDAQ:NVDA), Meta Platforms (NASDAQ:META), Royal Caribbean Cruises (NYSE:RCL), and Tesla (NASDAQ:TSLA).
Approximately 184 stocks in the index have double-digit returns in 2023. Conversely, 102 stocks have double-digit losses halfway through 2023. As of June 27, 286 of the index components are in positive territory for the year. That leaves 217 in negative territory.
I’ve been tasked with recommending three large-cap stocks to buy that are on sale. I’ll be sure to select three of the 102 companies in the red in 2023. Hopefully, I will have enough options to choose three names from three sectors.
Here goes.
Estee Lauder (EL)
Estee Lauder (NYSE:EL) has the worst performance of the three in 2023, down 23.7%. As a result of this correction, it is trading where it did in July 2020, precisely three years ago.
In early June, Oppenheimer analyst Rupesh Parikh lowered his rating on EL stock from Outperform to Perform, but more importantly, removed his $250 price target.
“We are downgrading EL shares to Perform from Outperform and removing our prior $250 PT,” StreetInsider reported.
“Following the company’s report in early May, recent developments on the consumer and beauty fronts, and another leg down in shares, we spent time revisiting our investment views on EL. Based on our work, we now see a less favorable risk/reward scenario. … “In contrast to the past, EL is no longer a beat and raise story, in our view, which suggests increased risk to the company’s-premium-multiple.”
That’s not good news for a company consistently delivering for its shareholders. It has an annualized total return of 15.94% over the past 15 years, 525 basis points higher than the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
Despite the downgrade, 21 of the 31 analysts that cover EL stock rate it as Overweight or an outright Buy, with a median target price of $240.
Estee Lauder’s trailing 12-month free cash flow is $1.05 billion [cash flow]. That’s just 1.5% of its market cap. I consider anything below 4% to be expensive.
While I’m not suggesting that it’s about to return to its December 2021 all-time highs of around $365, I believe it can reach $250 by the end of calendar 2024. The analyst estimate for 2024 is $5.28 a share. That might not be as high as their earnings from 2022 and 2021, but it still would be one of the best annual EPS numbers in its history.
Bank of America (BAC)
How bad could owning Bank of America (NYSE:BAC) stock be if it is Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) largest equity holding, accounting for 7.8% of the holding company’s $370 billion stock portfolio?
I get the investor resistance to buying BAC. It’s down 0.4% over the past five years, more than 61 percentage points worse than the S&P 500. Warren Buffett continues to hold BAC because he knows the bank will go on another heater at some point in the future, just as it did between March 2020 and January 2022, when it gained 150%, 47 percentage points better than the index.
While you wait for the next heater to arrive, you’ll get paid 5.21% annually — the combination of dividend and buyback yields — easing the pain of a sometimes lethargic stock.
There’s no question Buffett factors the shareholder yield into his decision to hold Bank of America. He’s on record supporting both dividends and share repurchases when used judiciously.
Speaking of Warren Buffett, Bank of America announced on June 27 that it would expand into nine new markets across four states by 2026. One of those markets is Omaha, Nebraska, where Buffett lives. Other markets include Boise, Birmingham, New Orleans, and others.
These markets already engage with the bank through its Merrill Lynch subsidiary, making them a natural fit for expansion. However, like a good retailer, it’s always repositioning its branch locations to best serve its customers efficiently and cost-effectively.
As a result, it is closing two branches for everyone it opens. Digital is the future for Bank of America.
Trading at 0.89x book value, it’s cheaper than it’s been since 2015.
Bath & Body Works (BBWI)
There is no question that Bath & Body Works (NYSE:BBWI) greatly benefited from the pandemic and work-from-home policies. Americans were buying hand soap like there was no tomorrow–online and off.
The downside is that when it returned to more normal buying patterns, investors fled the stock, moving on to the next great buying opportunity. BBWI stock is down more than 50% from its all-time high of $82 in November 2021.
In Q1 2023, the company generated revenue of $1.40 billion, 4% lower than a year earlier but 61% higher than in Q1 2019, before the pandemic, when it was part of L Brands. It was separated from Victoria’s Secret & Co. (NYSE:VSCO) in August 2021.
In terms of operating income in the first quarter, it earned $181 million, down from $280 million a year earlier but slightly ahead of its Q1 2019 operating profit of $155 million.
The company is in the early stages of implementing cost-optimization initiatives that will get it back to 18% operating margins before the pandemic.
With a PEG ratio of 1.09, I have no problem recommending Bath & Body Works for the long haul.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
