While many stocks have struggled in the past couple of years, shares of some of the U.S.’s best businesses have kept chugging higher.
That is because while many companies’ profits falter as much of the economy weakens, the best-run companies, with the strongest brands, can find ways to take market share and grow. A look at the
Invesco S&P 500 Equal Weight ETF
highlights what is going on.
As its name implies, the exchange-traded fund owns equal amounts of the companies it holds, so unlike the
S&P 500,
buoyed by surges in heavily weighted companies like Amazon.com and Microsoft, it reflects the average move in stocks. At about $146 on Monday afternoon, the price is more or less where it was in June 2021, reflecting expectations among investors that the Federal Reserve’s effort to fight inflation by raising interest rates will hurt the economy and corporate profits.
Various rallies have consistently failed to bring the price above the mid $150 range, much less the record high of $160 reached in December 2021, before the Fed started raising rates in March 2022. For the market to bid stocks significantly higher, investors need more evidence that economic growth will slow without a recession, that the Fed is truly finished raising rates, and that forecasts for profits won’t go much lower.
Barron’s has identified seven powerhouse shares that have done much better.
Prices of all seven have been trending upward since around the middle of 2022, ending higher after each brief dip. That has put them in position to reach new highs fairly soon, as long as their earnings continue to meet expectations.
And the chances they can do that seem reasonably good. While a weakening global economy is a challenge for some, profits are still growing fairly briskly because the underlying businesses are strong. A look at the companies makes the case.
Starbucks
stock is up 43% to $102 from a low of $71 in mid June 2022. That gain is almost double the rise in the
S&P 500
in that time. Shares have consistently seen buying support in the low $90 range for more than a year.
Third-quarter sales grew 12% year over year, as the company added stores globally, while revenue in North America increased 8%. Spending per transaction has risen as loyalty efforts such as the Starbucks app keep consumers buying new drinks.
Profit margins have risen, especially as increases in expenses for products and compensation have slowed down. Analysts at Evercore wrote in early November that the company can continue to achieve growth of almost 20% in earnings per share.
Monster Beverage
is up 28% to $55 from a mid-June 2022 low of about $43, outpacing the S&P 500’s gain since then by a few percentage points. A recent decline stopped in the high $40 range.
Sales are growing at percentages in the low double digits, led by international markets, as energy drinks become more popular overseas. Monster is also buying alcohol businesses, allowing it to market hard seltzers as a form of energy drink.
Gross margins increased in the last quarter as aluminum costs settled down. The company continues to buy back stock, allowing earnings per share to grow at percentages in the teens.
Booking Holdings
stock (BKNG) almost doubled from a low point in late September 2022. At $3,115, it is nearing its record high of $3,243.01, reached on Aug. 7.
Sales are growing at a double-digit clip. That is partly because the company is succeeding in encouraging people who have used its service to reserve hotels to book flights as well, and partly because management is leveraging its dominant platform outside the U.S.
Billions of dollars in cash flow are available for share buybacks, especially because the business requires minimal capital investment. That allows EPS to grow faster than sales.
Apple
is up about 44% to $190 from a mid-June 2022 low, and is closing in on its record closing high of $196.45, reached on July 31.
Hardware sales may be increasing more slowly than in the past, but sales of services continue to grow by double digits as Apple offers products such as cloud storage to the billions of people who use its devices. Services offer higher margins than hardware, helping net profit to grow 10% in the latest quarter.
EPS increased 13% as management continues to buy back stock. The company’s reliable and growing dividend is a bonus for investors.
Darden Restaurants
(DRI) stock is up about 35% to $156 from a mid-June 2022 low, and is nearing its record closing high of $172.18, reached on July 20.
Sales grew just over 11% in the most recent quarter as prices rose and the volume of transactions grew, led by strength at Olive Garden and LongHorn Steakhouse. That is an impressive feat, given declines in sales volume at smaller chains such as Applebee’s, owned by
Dine Brands Global
(DIN). Darden is continuing to repurchase hundreds of millions worth of stock.
Elsewhere,
UnitedHealth Group
(UNH) and
Humana
(HUM) continue to benefit from the increasing number of Medicare Advantage patients. Both stocks are up more than 20% from mid June 2022 and nearing new highs.
Watch all seven for more gains.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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