Key Stocks Valuation Board
Summary
It’s not only about the “Magnificent 7”
In our previous article regarding market valuation, we’ve covered the most important stocks moving the S&P 500 (read it here). However, our holdings include a slate of promising stocks which also deserve to be valued separately as well. In this article, we shall cover:
Advanced Micro Devices Inc (AMD)
Zions Bancorporation NA (ZION)
ServiceNow Inc (NOW)
Fair Isaac Corp (FICO)
McDonald's Corp (MCD)
WW Grainger Inc (GWW)
Range Resources Corp (RRC)
Progress Software Corp (PRGS)
Amgen, Inc. (AMGN)
Exxon Mobil Corp (XOM)
While 2023 has clearly been the year to own mega-cap stocks (and avoid almost everything else), 2024 is shaping up to be a bifurcating year. Either we get a recession and an accompanying stock market downturn, or “the rest of the market” will surge and at least catch up with the performance posted by the “magnificent 7”.
In the latter scenario, investors will want to own the most promising names, from various industries, which are set to outperform. We’ll start this article series by looking at our current holdings. At the end of this article, we shall sum up their price targets and industry types into a comprehensive conclusion.
Full disclosure: we own all of these companies, but we will attempt a fair valuation in each case.
Analyst Price Targets and Statistics
First of all, let’s take a look at the combined capital appreciation potential, according to sell-side analysts. We can expect a 6.81% 1 year gain, assuming an equal weight distribution, similar to the top 10 companies in the S&P 500. Below, you can find our own models, constructed with the help of machine learning systems.
This screener type shows us the expected move to different key levels for each stock. We are more interested in their fundamental distance to Price-Target in this article (currently at a combined -0.18%), assuming an equal weight distribution. So let’s adjust that for index-weighting.
That comes down to an expected 3.41% combined price appreciation, if all of these companies would reach their analyst Price Targets in the next year. However, are those Price Targets realistic? What are the underlying assumptions?
We need to investigate further and create our own models in order to validate these assumptions. We will employ the help of our ML models for this task, and set projections to Neutral. As an extra step before assigning a Price Target, we will check with individual sell-side analysts and see if they agree.
Models & Price Targets
Conclusions
According to our Price Targets for this selection of stocks, the combined capital appreciation potential is above 15%. Of course, our models do not account for company specific catalysts, since they are mainly projected using machine learning techniques. But taken as a group, we believe this portfolio has good odds of generating outperformance. There are a couple of caveats to be taken into account at the next rebalancing session:
Like many software stocks, ServiceNow Inc (NOW) and Fair Isaac Corp (FICO) are almost priced to perfection and have little upside left; we will need to reduce or sell these positions entirely;
The stocks with the largest potential price appreciation (RRC and XOM) are both energy companies; should commodities trade poorly in 2024, they will underperform; they do represent a hedge against inflation, however;
From a risk-reward perspective (using our CAGR adjusted charts), the most attractive stocks are AMGN, PRGS and XOM; they are trading near the lower channel trend-line, a technical place that signifies we are getting a good deal if our assumptions prove to be correct; however, we would be hesitant to add to these positions right now, since they have not participated in the latest market rally; if they couldn’t get sufficient bids with the market trading near the highs, it’s unlikely they will outperform in a downturn
We’ll keep you posted with our rebalancing process for 2024. As always, you can request new tickers for analysis using this page. All of the analyzed stocks with price targets and models are available on the Dashboard / Stock Ratings section.
Andrei Sota