Head of Corporate at VG Global Holdings
(Published March 16, 2023)
The last year has been one of high inflation and repeated federal fund rate raises, amounting to a whopping cumulative increase of 4.25%. This took a toll on the financial markets, and the S&P 500 for example had its worst year since 2008. The new year brings about even more uncertainty with fears that the US economy may slip deep into recession, which could spread into a global recession. With this in mind, picking the right stocks for the upcoming year, with all the uncertainty that is dominating the markets, is going to be difficult – this may be a time to be conservative, and picking mature and stable companies over smaller and more potentially lucrative investments, while also accepting a lower growth capacity. I think the way to go is to choose companies which are established and poised for growth due to a renewed focus on streamlining and efficiency, new technologies, pricing power, new product launches, or all of the above.
1. Amazon (AMZN)
Amazon is a mega industry leader e-commerce retailer, but it does more than just sell products online: it is the world’s largest cloud computing provider, and its Amazon Web Services (AWS) platform has a larger market share than either Microsoft’s Azure or Alphabet’s Google Cloud; it earns commissions and sells warehousing and other services to third-party sellers; it generates revenue through Prime, Kindle Unlimited and other subscription services; it also owns physical stores, including the Whole Food Market chain, purchased in 2017. 2022 was a tough year for the company as it lost about $8 billion on its e-commerce business worldwide, and, although the high-margin AWS segment was profitable, growth slowed in the third quarter and missed expectations, and the company also announced plans to lay off up to 20,000 employees. However, in 2023, the profit comparisons will be easier, and its CEO, Andy Jassy, has promised to focus on streamlining the company’s cost structure, including reviewing its international and devices segments – this focus on efficiency will usher in strategic and cost-cutting changes in the right areas. In addition, its stock price has fallen by over 50% so it is relatively cheap right now.
2. Dollar General (DG)
This is an established chain of discount stores selling consumer staples – including its own private-branded goods alongside popular products from Clorox, Procter & Gamble, Coca-Cola, Kellogg’s, General Mills and many more – for low prices in many neighbourhood locations, with a staggering 18,000 stores in 47 U.S. states. While the company is feeling the pressures of higher costs, these are balanced by reported increases in foot traffic and how much customers spend with each transaction, and the company leaders are now focused on streamlining their supply chain, which will help with the current inflation trend, and the company is also supporting revenue growth through expansion. Dollar General also returns value to its shareholders through share repurchases and dividends – at 0.9% it is not a massive amount but annualized 3-year dividend growth rate is more than 13%.
3. Wells Fargo (WFC)
Wells Fargo provides banking and investment services to a staggering amount of consumers and businesses, amounting to 33% of all U.S. households and 10% of U.S. small businesses, while also having a stronghold on lending to mid-sized U.S. companies. Its stock price is down around 25% while the company works through some lingering regulatory issues resulting from the fake accounts scandal from 2016 – the Federal Reserve imposed an asset cap of $1.95 trillion, which remains in place today, and it will only lift that cap once the bank has strengthened its internal processes to prevent something similar happening in the future. In addition, the company is still accruing costs for litigation and customer remediation, costs which totalled $2 billion just in the third quarter of 2022, but the bank is working to improve its internal processes, lower expenses, expands its product offerings, and improve its technology platforms. All this should help Wells Fargo emerge stronger this year, and its low stock price should be a very attractive proposition for safety investors.