The stock market may hit new lows in the new year, but there are some stocks where investors can weather market volatility, according to MKM Partners. Many of the forces that weighed on stocks in 2022 will remain in 2023, at least for the first half of the year. That includes economic uncertainty as a result of the Federal Reserve’s aggressive rate hikes to tame high inflation. “As 2023 progresses, we expect the economy to weaken due to tight monetary policy and a continued decline in excess liquidity,” said MKM Chief Economist and Market Strategist Michael Darda. “Fed’s ‘tight-and-hold’ policy may trigger deeper recession than expected.” That doesn’t bode well for stocks and means there’s a big risk the stock market will see a new low next year, he said. In general, markets tend to fall about two-thirds of the way down the path of declines, rather than before they begin, the note said. In that market environment, MKM recommends focusing on defensive stocks and avoiding sectors trading at high cyclically adjusted valuations. The firm has compiled a list of its top picks where investors can find safety as they face volatility in the first half of next year. Top Picks One of MKM’s top food and beverage picks is Walmart, which he says could outperform its peers and acquire in 2023. “Walmart is gaining share relative to grocery peers, but discretionary categories have been soft,” analyst Bill Kirk. wrote: However, there is potential upside for Walmart because of its dominance. He also expects the company to report fourth-quarter 2022 earnings early in the year and outperform rivals for the rest of 2023. Walmart’s market share gains,” he said. “With lower costs and inventory pressure, profitability should improve.” A troubled economic backdrop is usually a negative for most companies, but it could be a positive for O’Reilly Automotive, another MKM top pick. “Lingering cost pressures have historically pushed consumers to keep their cars longer and repair themselves out of economic necessity,” writes analyst David Bellinger. “In our view, O’Reilly should continue its push toward $40+ revenues amid more programmatic buybacks. MKM’s top pick in insurance is Arch Capital Group. “Arch Capital Group remains our top pick because it is the most leveraged. (Re)Insurer at higher rates in the US as the company’s cycle management strategy allowed it to shed capacity when rates were lower and move back aggressively when rates started to rise in late 2018,” wrote Harry Fong. MKM sees investors neglecting leverage. that Arch is positive in the current cycle. The company believes that Arch is close to improving earnings and that the outlook looks positive. “Some investors continue to penalize the company for being in the mortgage insurance business,” Fong said. “However. The company has withdrawn capital from the mortgage insurance business (not its core business), some of which is moving into the P&C business.” The pick with the biggest upside potential is Talos Energy, which MKM is bullish on. 47% to its target price. “We view it as the most catalyst-rich name in the field, and it’s one of the oil names with more than 70% oil cuts,” said analyst Leo Mariani. “We also expect the company to benefit from an increase in its market capitalization to above $2 billion and modest deleveraging following the completion of the merger with EnVen Energy, allowing more investors to own it.” Additionally, Talos Energy is the only E&P stock involved in carbon sequestration, where the business is valued as a free option for investors, according to MKM. That success should lead to some multiple expansion in 2023, they said. Last of the top five on the list is World Wrestling Entertainment. which has more than 22% upside to MKM’s price target. This is due to the growth opportunities available for the company. While the upcoming negotiations for Raw and Smackdown’s US television rights are the most important catalysts, MKM sees other significant developments such as international expansion. , improved brand monetization, digital and web monetization and potential mergers and acquisitions. — CNBC’s Michael Bloom contributed to this report.
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