Price-to-earnings multiples suggest recession. But in 2022, majorities said similar things. But how many can stay that low? We’ve all read dozens of articles about what 2023 will bring us. I think most of them are sincere. Their only drawback is that, as always, they do not touch the stocks themselves. They might say that the S&P 500, which currently trades at 18 times earnings, could trade for 16 times earnings even if earnings remain relatively flat. Or, they might say, if the terminal rate is 5% over the Federal Reserve’s fed funds rate, we can make a 14x return. But these analyzes don’t tell you how they hit the S&P target. So I want to attack the S&P target thesis by looking at a few stocks that point to the futility of forecasts. Let’s start with two stocks: Johnson & Johnson (JNJ) and Nucor (NUE). One of my favorites in the club portfolio, pharmaceutical giant J & J, trades at 18 times forward earnings for 2023. In my opinion, given that their earnings should not be hurt by the slowdown, this reflects the impending recession. If we get a recession, then stocks will be trading higher, not lower, because a recession would likely signal the end of Fed rate hikes. Now take Nucor, the world’s top steelmaker. It will earn $28 per share this year and is forecast to fall to $12 per share next year as the likely recession continues. I’m having a rough time at 4x earnings at which it currently trades, but it’s clear that the stock market is poised for a major downturn that will more than halve Nucor’s earnings. But where do these profits come from? The biggest gainer sector will be infrastructure, which should take a hit rather than take a hit given new federal government spending next year. Those infrastructure costs include everything from bridges and tunnels to buildings, which Nucor dominates. At that time, Nucor also has exposure to heavy oil and gas through its pipeline and heavy equipment businesses. Meanwhile, industrial Caterpillar ( CAT ) is selling at 18 times earnings on demand. This taunts Nukor 4 times. With these recent markets and CAT’s dramatically higher multiples, something has to give. Something is wrong. I think it’s Nucor’s earnings estimates for 2023 — they’re too low. My point is that you have the most cyclical stocks that are trading like they are falling apart, but the heavier equipment is trading not only higher, but higher than the traditional cyclicals. My conclusion is that JNJ is “right” in what it sells, Caterpillar and the like are probably a bit wrong – very high, but still in the mix – and Nucor and the like are just plain wrong. So why aren’t we buying Nucor? Because I think it might go down. Meanwhile, the auto sector looks large and the car is seen as something that will decline as demand declines next year. I think the market seriously misjudges this thesis. People stopped buying because cars and trucks were unnaturally high due to supply constraints and high interest rates. Ultimately, I think cars will hold strong in a recession. Therefore, the best compromise is Ford (F), which should make the most sense by avoiding another supply shock from China. We added to our position in Ford on Thursday. Still, all things considered, I’d like to make one more point: If Caterpillar or Deere ( DE ) were to break lower, it would make a lot of sense to buy. Another challenge: Aerospace. The recession should dry up aircraft demand, but replacement is essential. Honeywell ( HON ), which makes cockpits and aircraft engines, trades at 24 times earnings, while Raytheon Technologies ( RTX ) trades at 21 times earnings. The latter was probably underestimated as a result of Russia’s war in Ukraine. Are they justified? They are the highest multiples in the entire market, including Club holdings Apple ( APPL ) and Alphabet ( GOOGL ). They could all meet in the middle. I can see that the large lids have narrowed a bit. Semiconductors is a moving target, albeit a bearish target, with the exception of Nvdia ( NVDA ), which trades at 44 times earnings, and is now a small Club position due to its weakness. All but the fastest-growing companies could trade at around 16-17 times earnings. This will be our broad assumption for next year – a mix of soft commodities with highers and cyclicals with lowers. Controversial stocks are in tech poised to disappoint, even if the so-called clearing event finally happens. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investment Club with Jim Cramer, you’ll receive trade alerts before Jim trades. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Packages of steel from Nucor Corp. sit for sale to Thompson Building Materials on Thursday, August 30, 2012 in Lomita, California, U.S.
Patrick Fallon | Bloomberg | Getty Images
Price-to-earnings multiples suggest recession. But in 2022, majorities said similar things. But how many can stay that low?