Investors looking for stock winners beyond this year’s “Magnificent Seven” may have a broader selection to choose from in 2024.
“Stock picking this year — other than riding the momentum of the big companies — has been really challenging for everybody, ” Aaron Dunn, co-head of the value equity team at Eaton Vance, Morgan Stanley Investment Management, told Yahoo Finance.
“My expectation is for 2024 that markets starts to broaden out more,” he added.
The portfolio manager says two major developments will create growth opportunities. For starters, the Federal Reserve is likely done raising interest rates. Second, companies that built up inventories through 2021 and 2022, are done getting rid of them, a concept known as “de-stocking.”
“We’re coming out of that, which should actually clean the plate or the table for everything to perform much better next year,” Dunn said.
As a result, he says investors may find growth opportunities in the following four sectors:
Real Estate
The S&P 500 Real Estate ETF (XLRE) is flat for the year. The interest rate sensitive sector took the brunt of the hit from mortgage rate spikes as housing transactions plummeted.
An end to the Federal Reserve’s hiking cycle, or possibility a decline in rates in 2024, should help real estate related stocks.
An uptick in home buyers backing out of deals as well as sellers opting to stay in their homes to avoid higher mortgage rates has pressured transactions, he said. Meanwhile, rising building costs could squeeze new supply coming onto the market.
“Especially with financing rates where they’re at, construction is going to slow [for] multi-families. So demand stays strong, and supply weakens,” he said.
Those dynamics could be a boon to the rental market.
“In my view, that demand for rental housing, whether it be Invitation Homes (INVH) or MidAmerica Communities (MAA) is actually quite interesting,” he said.
Invitation Homes offers updated homes for lease and MidAmerica Communities invests in apartments across the US.
Basic Materials
Basic materials companies are at the heart of the de-stocking trends, because the materials they produce — ranging from chemicals to tin and timber — go into all sorts of products.
“What I like is that they’ve already gone through de-stocking, and they’re towards [the] back end of that process,” said Dunn.
One stock to watch for is FMC (FMC), a developer of insecticides and herbicides for agriculture use.
“’It’s really traditionally a very high quality business, and is trading at a substantial discount to what it has in the past,” said Dunn, referring to the stock’s 60% year-to-date decline.
“From a value perspective, I think over the next three years that FMC is going to do extremely well,” he added.
Healthcare
Funding in the healthcare space took a hit this year amid elevated interest rates. Dunn believes “pick and shovel”companies, which help healthcare firms by adding new equipment and building capacity, are well positioned going into 2024.
One name to consider is Thermo Fisher Scientific (TMO), a provider of everything from medical equipment to software and analytical tools for the pharmaceutical and biotech industries.
“We think funding in the health care space will return,” said Dunn. “Thermo in our view is the most diversified but also one of the better run companies in the space and probably the leader in the space.”
Another stock his team likes Zoetis (ZTS), an animal healthcare company.
“In our opinion there’s two products they have coming. One is pain management for felines, and one is pain management for canines. And…these are new novel treatments to the market,” said Dunn.
Semiconductors
Most investors equate the semi space with the “Magnificent Seven’s” best performer Nvidia (NVDA), whose stock is up 229% year-to-date. Yet Dunn and his team are focused on opportunities among traditional players in the memory and personal computing space, which this year saw inventory corrections.
“A name like Texas Instruments (TXN), which has sort of industrial type semiconductors, analog semiconductors, has gone through a lot of de-stocking and [its] underlying demand could actually be quite strong on the other side of this,” he said.
Texas Instruments is down about 7% year-to-date. The stock is part of the VanEck Semiconductor ETF (SMH), which is up 61% since the start of the year.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.
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