Dow Jones Bear Market: The Smartest Investors Are Buying These Beaten Down Stocks

Smart investors often want to go against the crowd or even go where there isn’t even a crowd at all. This is pretty much the thought behind the action-like look GE Healthcare Technologies (GEHC 4.43%), United States Parcel Service (UPS 1.12%)and Apple (AAPL 1.92%). That’s why all three are worth a close look by astute investors.

1. GE HealthCare Technologies, a spin-off from General Electric

The recent spinoff from General electrical (GE 1.07%) There isn’t much analyst coverage yet, but that shouldn’t stop savvy investors from looking. The company has already announced its fourth quarter earnings (to be released on January 30), and they look good.

For example, management expects 5% to 7% organic growth in 2023 along with profit margin expansion and 85% free-cash conversion (FCF) from net income. Meanwhile, organic revenue growth in the fourth quarter was a whopping 12%, with earnings above previous guidance.

The imaging and ultrasound-focused company has plenty of potential to grow margins, and with FCF of around $2.1 billion in 2022, it’s trading at 14.2 times its FCF. This is too cheap for a world-class company with a large equipment base installed in medical facilities. In addition, the healthcare equipment company also owns a high margin complementary pharmaceutical diagnostics business.

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Throw in the fact that earnings and cash flow are being depressed by ongoing supply chain issues (which will hopefully subside through 2023), and the stock looks like an even better value.

2. UPS continues its transformation strategy

A slowing economy means weaker demand for package delivery, and that’s not good news for UPS. rival, FedEx (FDX 1.44%) is already restructured in response to slow demand. UPS will surely come under pressure as well, which is why Wall Street analysts have lower revenue and earnings in 2023.

Still, it’s essential to keep some perspective here. The forward estimate of $12.23 in EPS for 2023 puts UPS at less than 15 times forward earnings. Plus, like Apple, UPS is a business that has benefited greatly from the pandemic. In other words, it is coming up against tough comparisons. In addition, and again in common with Apple, UPS is improving the underlying profitability of its business.

As previously discussed, the transformation strategy of focusing on selected end markets (such as small and medium businesses and healthcare) while being more selective on delivery (focusing on higher margin deliveries) resulted in a tangible improvement in hidden and free margins. cash flow.

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Investors in UPS can expect this trend to continue into 2023, and the stock’s 3.3% dividend yield provides decent income while you wait for the economic cycle to turn again.

3. Apple’s service growth means higher profit margins

Undoubtedly, the pandemic and the stay-at-home measures imposed on the population have created a boom in the demand for electronic devices. This is evident in Apple’s strong revenue and earnings before interest, taxation, depreciation, and amortization (EBITDA) in the back half of 2020 and 2021. Of course, this creates difficult comparisons, and Wall Street analysts have Apple’s revenue growth moderate in low single digits. and flat EBITDA in 2023.

As such, the stock has sold in 22% over the last year.

AAPL Earnings Chart (TTM).

Data by YCharts.

But here’s the thing. As you can see above, the current enterprise value (market cap plus debt-to-EBITDA valuation) is similar to what it would be entering 2020 (when very few could have predicted the pandemic). Moreover, Apple is a different business now in this. Its higher-margin service business grew at a much higher rate than its product business (iPhone, Mac, iPad, Wearables, Home, and Accessories).

In fact, in the last reported quarter, Apple’s services business accounted for 21.2% of revenue (from 17.8% in 2019) and almost a third of gross profit (compared to a little less than 30% in 2019). Also, note that Apple’s service gross profit margin has increased considerably.

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Apple metric

2019

2020

2021

2022

Product revenue

$213.9 billion

$220.7 billion

$297.4 billion

$316.2 billion

Growth

(5.3%)

3.2%

34.7%

6.3%

Gross profit

$68.9

$69.5 billion

$105.1 billion

$114.7 billion

Gross margin

32.2%

31.5%

35.3%

36.3%

Service Revenue

$46.3 billion

$53.8 billion

$68.4 billion

$78.1 billion

Growth

16.5%

16.2%

27.3%

14.2%

Gross profit

$29.5 billion

$35.5 billion

$47.7 billion

56 billion dollars

Gross margin

63.7%

66%

69.7%

71.7%

Data source: Apple presentation.

All told, even though Apple’s overall growth is likely to slow in 2023, the underlying growth in higher-margin services growth will improve the company’s long-term margins and earnings potential. Meanwhile, the stock is moving in value range.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and FedEx. The Motley Fool recommends United Parcel Service and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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