I’m tasked with providing readers with some of the final top stock picks of the year.
It’s been brutal for some S&P 500 stocks in 2022. Align Technology (NASDAQ:ALGN) has lost nearly 70% of its value, while others such as Warren Buffet’s big play, Occidental Petroleum (NYSE:OXY), is up nearly 130% heading into December. Thus, plenty of stocks are doing just fine.
Notably, the S&P 500 has been moving higher, up approximately 6% in the past month. Thus, investors are trying to figure out whether the rally can last into 2023. The S&P Composite 1500 is up more than the S&P 500 in the past month, and down a tiny fraction less, on a year-to-date basis.
I’ll use the S&P 1500 as my selection group for the top stocks for December 2022. Stocks qualify for this index with a minimum market capitalization of $1 billion, high earnings yields (low price-earnings ratios) and high returns on invested capital. And as always, I’ll diversify my top stock picks across seven different sectors.
|GRBK||Green Brick Partners||$24.42|
|PFG||Principal Financial Group||$92.47|
|CCRN||Cross Country Healthcare||$35.32|
Starting off our list of top stock picks worth considering in this current market, we have Gogo (NASDAQ:GOGO).
If you’re unfamiliar with Gogo, this company provides broadband connectivity services for the business aviation market. The company’s Avance L5 and LG systems are installed in 3,079 aircraft, with the company’s ATG systems in 6,777 aircraft, and its narrowband satellite connectivity installed in 4,484 aircraft.
While Gogo’s business is financially having an excellent year, its stock has been on a rollercoaster. GOGO stock is up more than 17% year-to-date. However, in April this stock traded close to $25, and near a low of $11 in October.
Thankfully, the company reported record third quarter results in early November. As a result, its shares have gained more than 12% over the past month.
On the top line, Gogo’s revenues rose 11% in the third quarter, to $105.3 million, while its operating income increased by 18% to $36.3 million. That’s a healthy 34% operating margin. In 2022, Gogo expects free cash flow of $55 million at the midpoint of its guidance. By 2025, its free cash flow should grow to $200 million.
GOGO’s enterprise value is $2.65 billion, 16.9x EBITDA (earnings before interest, taxes, depreciation and amortization). That’s half its five-year average multiple.
Green Brick Partners (GRBK)
In March, I wrote about seven holdings of billionaire hedge fund owner David Einhorn. One of those names was Green Brick Partners (NYSE:GRBK). This was certainly among the top stock picks at the time, having gained 48% in Q4 2021 alone.
The hedge fund partnered with long-time homebuilding veteran Jim Brickman in 2009. Green Brick went public five years later. I said something proactive at the time of the article’s publication (Mar. 2): “As long as the housing business remains strong, GRBK is a lock to keep moving higher in 2022 and beyond.”
At the time, new home sales were just starting to turn negative.
In December 2021, there were 839,000 new homes sold. This number dropped to 831,000 at the end of January, and 790,000 at the end of February. Home sales continued dropping in March and April before turning higher in May. After that, it’s been up and down ever since.
As for Green Brick stock, it’s down 16%, identical to the S&P 500.
The company’s financials were still healthy as of Sept. 30. Revenues were up 19.2% year-over-year to $407.9 million, with a record homebuilding gross margin of 32.4%. This impressive gross margin was 550 basis points higher than Q3 2021, and likely higher than most publicly-traded homebuilders.
“Our strong balance sheet with a 28.0% debt-to-total capital ratio and record gross margins gives Green Brick more flexibility than most peers to effectively manage pace versus price decisions going forward. We view the current challenges as a potential opportunity to increase market share,” said CEO Jim Brickman in its Q3 2022 press release.
Long-term, I like this company’s chances.
PDC Energy (PDCE)
This isn’t the first time I’ve picked PDC Energy (NASDAQ:PDCE) in 2022. Most recently, I suggested that the Colorado and West Texas oil and gas producer could be a buyout target.
Interestingly, if you look at the long-term chart for PDCE stock, it’s hit or been near $80 on three occasions since 2000. The first was May 2008, followed by December 2016, and then April 2022. In both cases where the floor gave out, shares traded near single digits.
So, if you were to buy, you’d want a quick trigger, or a plan to average down to the bottom. But, in the end, you will make money holding this stock.
The 14 analysts that cover its stock give it an average rating of overweight with a $97.50 target price, 30% higher than where it’s currently trading.
PDC reported Q3 2022 results that included revenues of $1.51 billion, $440 million in adjusted free cash flow, total production of 250,000 barrels of oil equivalent per day (Boe/d), and $300 million in debt repayment.
In Q4 2022, it expects to produce 235,000 Boe/d. Its capital investments for the entire year are expected to be $1.08 billion.
Free cash flow for the trailing 12 months ended Sept. 30 were $1.66 billion [key ratios]. Based on a market cap of $6.9 billion, the company’s free cash flow yield is 24.0%. I consider anything above 8% to put a company in value territory.
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Principal Financial Group (PFG)
Of the 70 financial stocks in the S&P 500, Principal Financial Group (NASDAQ:PFG) has the fourth-best performance in 2022, up more than 25% year-to-date. It’s gained more than 14% in the past month alone.
If you’re unfamiliar with the company, it does three things well:
- It offers variable annuities and life insurance products to the business and business-owner market.
- It is one of the largest providers of retirement solutions in the U.S.
- It is a provider of global asset management services to sophisticated investors worldwide.
In 2021, the company began a transformation to better serve its customers. It did so, not because its business was failing, but rather to stay ahead of the competition.
“While we’re transforming important aspects of our business, our core strengths remain unchanged,” Principal CEO Dan Houston stated in its 2021 annual report.
“Our global, diversified business model sets us apart and weathers a variety of economic conditions. Our stronger focus has sharpened the interplay and interdependencies of our businesses, generating additional value.”
Investors are buying its plan.
In Q3 2022, Principal’s trailing 12-month pre-tax operating earnings were $2.19 billion, 3.3% higher than in the same period a year earlier. In addition, its book value per share at the end of September, excluding AOCI (accumulated other comprehensive income) was $50.55, 2.6% higher than at the end of 2021.
Can it keep moving higher in December?
While it’s going to be tough given the current economic uncertainty, and it’s trading near an all-time high, PFG stock provides a reasonably good dividend yield of 2.8% to keep you happy if it doesn’t move in the year’s final month.
Cross Country Healthcare (CCRN)
Cross Country Healthcare’s (NASDAQ:CCRN) primary revenue generator is nurse staffing for hospitals and other healthcare facilties.
This segment of the Florida-based workforce solutions and advisory firm accounted for 96% of its $636.1 million in Q3 2022 revenue. Physician staffing accounts for the remainder. Notably, nurse staffing accounts for 98% of its contribution margin.
The company’s largest single source of revenue comes from its managed service programs (MSPs). These programs accounted for 55% of its overall revenue in the third quarter. Since 2019, the annualized contingent labor spend by the MSPs it manages has increased four-fold to $2 billion.
In the second quarter, the company launched Intellify, its proprietary cloud-based Vendor Management System (VMS). Intellify will be used for new and existing MSP clients. Technology solutions such as Intellify will help its clients manage their healthcare spend.
As of October, Cross Country had 10 MSPs live on Intellify with five more deployments planned by the end of the year. Intellify is expected to save clients millions annually. It will be deployed to all its existing clients within 18 months.
The seven analysts who cover this stock give it an overweight rating with a $39.33 target price. CCRN stock is up nearly 27% year-to-date, and is one of the top stock picks on my list for good reason.
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If you’ve got product to ship to or from Asia, Matson (NYSE:MATX) is a company you can rely on to get the job done. Based in Hawaii, it’s been delivering the goods since 1882. In addition to a fleet of owned and chartered vessels, the company has provided logistics services for customers since 1987.
Being among the top stock picks on this list, many may be concerned with this company’s recent performance. Indeed, MATX stock hasn’t fared well in 2022. It’s down more than 28% year-to-date. However, it’s up 119.2% over the past five years, more than double the S&P 500.
In the latest quarter, Matson grew revenue 4% to $1.11 billion, with EBITDA of $377.4 million, 9.7% less than Q3 2021. However, except for Alaska, its year-over-year volume of containers was lower during the quarter. The obvious reason for this slowdown can be traced back to China’s ongoing Covid-19 lockdowns and tight restrictions, which reduced its transpacific traffic significantly.
During the quarter, Matson signed a $1 billion contract to acquire three LNG-ready Aloha Class containerships. The ships will add 500 containerships per voyage to its CLX (China-Long Beach Express) service. Notably, this move will help accelerate the company’s growth, when China gets back to operating at full capacity.
I like Matson because this company has a sound balance sheet. Its long-term debt is $461.3 million, or just 19% of its market cap, while its free cash flow in the trailing 12 months is $1.3 billion [key ratios], more than half its current market cap.
Unless companies start flying their product from Asia, Matson is in good shape for years to come.
You might say that this pick is suicidal, given I’ve already selected one housing-related stock to the mix with Green Brick Partners. Instead, I want to add a second, given Louisiana-Pacific (NYSE:LPX) is one of the top stock picks I’ve been watching for some time. This company is a manufacturer of engineered wood products and other high-performance building solutions for new home construction and remodeling/renovation jobs worldwide.
Like most housing-related stocks, LPX has gotten hit hard in 2022. It’s down more than 18% year-to-date, more than 200 basis points worse than the S&P 500.
While its overall sales were down in the third quarter by 16%, its Siding Solutions business had higher sales ($394 million to $388 million) than its legacy OSB business. The company’s siding business saw sales increase by 26% due to a 16% increase in price and 9% increase in volume.
The company’s adjusted EBITDA jumped 24% in the quarter to $90 million. However, this profitability surge wasn’t enough to overcome the 70% decline for its OSB business. Overall, Louisiana-Pacific’s adjusted EBITDA was $200 million, down from $480 million a year earlier.
While the company’s cash flow declined $180 million in the first nine months of 2022 to $1.1 billion, it still generates substantial free cash flow with very little long-term debt. This provides a relative buffer for those concerned about this current housing slowdown.
By every valuation metric, LPX is cheaper than it has been in years. This company clearly deserves a spot on this list of top stock picks, in my view.
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