There have been plenty of ups and downs over the past 12 months, and our overseas investing expert got a lot right in 2022. Here, he runs through some of his winners and losers, and explains his current thinking.
While 2021 was a year for buying stocks that would recover best from the pandemic, 2022 was a time to shed tech companies whose shares had run too far too fast. This was, admittedly, not a repeat of the boom and bust that characterised the turn of the millennium: tech companies today do have genuine products, real income and often solid profits.
However, with price/earnings (PE) ratings often running into the thirties and dividends sometimes still a pipe dream, a share price slide can turn into an avalanche. The tech-heavy Nasdaq Composite index had already begun its retreat in November 2021, when it peaked around 16,000 points, and has shed more than 30% of its value in 2022.
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The big worry was how far and how fast interest rates would rise in 2022, with the US set to lead the way. Banks, which traditionally benefit from rising rates, are the first to announce their results and in January I suggested that investors should hold back from the sector until share prices settled, with better times possibly due in mid-year.
Citigroup (NYSE:C) did not hit the bottom until November, as did JPMorgan Chase (NYSE:JPM); Goldman Sachs (NYSE:GS) picked up in mid-year but took another dip to bottom out again in September; Wells Fargo & Co (NYSE:WFC) bottomed earliest but is now showing signs of weakness.
US banks are currently on more reasonable PE ratios and yields than they were at the start of the year. The upward momentum in share prices should continue into the New Year and, Wells Fargo excepted, the sector is generally worth buying into.
Crude oil prices took off as Russia, a major producer of oil and gas, invaded Ukraine and disrupted the world economic scene. I upgraded Exxon Mobil Corp (NYSE:XOM) and Chevron (NYSE:CVX) from hold to buy in February, since when Exxon has risen from $80 to a peak of $114 and Chevron from below $140 to nearly $190. The case for buying is not as strong now but it just about holds given the yields on offer.
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The pharmaceutical sector has continued to benefit from the lingering effects of Covid-19, but investors must look to the future. Merck (NYSE:MRK) stood out as a buy around $78 in February and before the month was out it began to race away. At around $110 with a yield of 2.5%, the shares are worth holding onto.
I was wrong about taking profits at Eli Lilly and Co (NYSE:LLY) though, as its shares have followed a similar path to Merck’s, soaring from $235 to $360. With a PE of 54 and a yield of 1.1% the shares look even more overpriced to me so, at the risk of being as badly wrong again, I would again say take profits – just bigger ones than you could have got in February.
A period of rising interest rates was always going to be problematic for house builders, but I hoped in April that there had been a sufficient correction in share prices in the sector for it to be worth considering. After all, the US economy was holding up well and Americans were keeping their jobs and even securing pay rises.
This proved a test of nerves as the slippage had further to run – I should have remembered that trends tend to continue longer than you expect – but the bottom came in June and a recovery since then leaves anyone who followed my advice with a decent profit. However, the likelihood that US interest rates will rise less than previously expected has now been fully factored in.
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D.R. Horton (NYSE:DHI) is back above $90 and, although this level could provide a temporary ceiling, I feel this is a trend that has further to run. Topside of $100 is surely attainable even though the yield is only 1%. Lennar (NYSE:LEN) shares have followed a similar pattern, also topping $90 with $100 awaiting. The yield is 1.6%. With the PE a deeply unchallenging 6, it looks right to hold on.
It could well be time to sell Taylor Morrison Home (NYSE:TMHC) though while the shares are back above $30, as they have turned back down at $33 or $34 in the past 12 months and there is no dividend.
KB Home (NYSE:KBH) has been the big disappointment in the sector and at $33 it is barely back to April levels. The yield is 1.8% and the shares are surely worth holding onto.
Nowhere has the wheel of fortune spun more viciously than at exercise bicycle and treadmill maker Peloton (NASDAQ:PTON), whose shares peaked above $160 barely two years ago but which is now bumping along around $10. I advised selling several times in the course of the past 12 months and that still stands. Only a really brave investor willing to risk losing heavily would buy for recovery at this stage.
Investors may not be too sorry to say goodbye to what has been, to say the least, a difficult year. Next year could be the time to look for recovering tech stocks. In this sector more than most it is wise to look for companies that are making a profit or on the verge of turning profitable. Remember that winners in previous years can be badly left behind by more nimble competitors producing the must-haves of the future.
Watch for manufacturers who were held back in 2022 by supply chain issues that have been resolved. One possibility is vehicle manufacturing. Attempts to save the planet by phasing out fossil fuels have, to coin an inappropriate phrase, run out of steam. Oil explorers could still be producing black gold. Banks stand to benefit from rising interest rates, even if the peak proves to be lower than previously expected.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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