As we hit the homestretch of 2022, the realization is setting in that this year hasn’t gone as investors had planned. The major stock indexes are set to close with their worst performance in more than a decade, while the bond market is tracking its worst year on record. Except for energy stocks, there simply haven’t been many positives in 2022.
But there’s a silver lining for investors: Every major decline in the broad-market indexes has eventually given way to a bull market rally that erases those losses. Effectively, every bear market is a surefire opportunity for long-term-minded investors to pounce on great companies at a bargain price.
What’s arguably even better is that you don’t need a mountain of cash to take advantage of the 2022 bear market. With most online brokerages doing away with trading fees and minimum deposit requirements, any amount of money — even $3,000 — can be the ideal amount to kick-start the new year from an investment standpoint.
If you have $3,000 ready to invest, which won’t be needed to pay bills or cover emergencies as they arise, the following five stocks represent some of the safest (and smartest) buys for 2023.
Johnson & Johnson
Topping the list of the safest stocks to buy with $3,000 in the new year is healthcare stock Johnson & Johnson (JNJ). Including dividends paid, J&J is actually up 6% in 2022, while the S&P 500 is down 18%.
The great thing about healthcare stocks is that demand for prescription drugs, medical devices, and healthcare services doesn’t depend on how well or poorly the stock market or U.S. economy perform. People will continue to get sick and develop ailments that require medical care in any economic environment. This leads to relatively predictable demand and operating cash flow for the largest healthcare stocks.
On a more company-specific basis, Johnson & Johnson’s building blocks work seamlessly with one another. J&J generates most of its growth and juicy margins from selling brand-name drugs. However, pharmaceuticals have a finite period of sales exclusivity. To counter this, it can lean on its industry-leading medical device segment, which is well positioned to take advantage of an aging population that’s progressively gaining access to medical services worldwide.
Also, Johnson & Johnson has increased its base annual payout for 60 consecutive years and is one of only two publicly traded companies that with the highly coveted AAA credit rating from Standard & Poor’s (S&P), a division of S&P Global. This means S&P has the utmost confidence that J&J can service and repay its outstanding debt.
NextEra Energy
Another exceptionally safe stock investors can confidently buy with $3,000 in 2023 is NextEra Energy (NEE), the nation’s largest electric utility by market cap. Although NextEra is down 5% (including dividends paid) in 2022, it’s delivered a positive total return to its shareholders in 19 of the past 20 years.
Similar to J&J’s situation, NextEra Energy benefits from the highly defensive nature of utility demand. If you own or rent a home, there’s a very good chance you can’t live without electricity. Further, since most electric utility providers act as monopolies or duopolies, homeowners and renters can’t exactly shop around for the best deal. It creates a scenario where electric utilities can fairly accurately forecast their operating cash flow many years in advance.
What makes NextEra Energy such a special company is its enormous investments in renewable energy. The company earmarked as much as $55 billion over a three-year stretch (2020 through 2022) for new infrastructure projects, many of which cater to clean energy. There isn’t a U.S. utility that’s generating more capacity from wind or solar power than NextEra.
On one hand, investing in green-energy projects is costly. On the other, NextEra was able to take advantage of more than a decade of historically low lending rates to fuel its renewable-energy expansion. As a result, its electricity generation costs have declined, allowing NextEra to deliver a compound annual adjusted earnings growth rate of 8.4% over the past 15 years. That makes NextEra a growth stock in a sector known for slow earnings growth.
AT&T
Telecom stock AT&T (T) is the third safe stock to buy with $3,000 in the new year. Inclusive of dividends paid, AT&T joins Johnson & Johnson in delivering a positive total return for its shareholders during the 2022 bear market.
To keep with the theme of this list (thus far), AT&T is supported by the fact that wireless access and smartphone ownership have evolved into necessities. This is to say, a weakening U.S. economy and historically high inflation haven’t sapped demand for wireless subscriptions or increased the churn rates of the major wireless providers. In short, telecom companies can expect steady operating cash flow, year in and year out.
In particular, AT&T is seeing a healthy tailwind from its wireless infrastructure investments, which are designed to support 5G download speeds. Since it had been about 10 years since major telecom providers upgraded their wireless infrastructure, we’ve been witnessing a strong consumer and enterprise device replacement cycle. AT&T recorded 5.6% wireless services revenue growth in the third quarter — its fastest year-over-year sales growth in more than a decade — and has recognized at least 200,000 AT&T Fiber net customer additions for 11 consecutive quarters.
The other big catalyst for AT&T was its spinoff of content arm Time Warner, which merged with Discovery to create Warner Bros. Discovery. When this merger completed in April, Warner Bros. Discovery assumed certain lots of debt previously held on AT&T’s balance sheet, and the merger also gave AT&T cash. The combined sum of this cash and debt assumption totaled a little over $40 billion. With greater financial flexibility, AT&T’s 6.1% yield remains rock solid.
Visa
A fourth extremely safe stock to buy with $3,000 for 2023 is payment processor Visa (V). Although Visa is down this year, its decline of 4%, including dividends paid, is much better than the 18% drop by the benchmark S&P 500.
Because financial stocks are cyclical — i.e., they ebb and flow with the health of the U.S. economy — they usually wouldn’t be considered “safe” investments during periods of heightened stock market and economic uncertainty.
But Visa is a different beast. For instance, historically high inflation has been a positive for the company, with consumers and businesses spending more on essentials and using credit cards to make these purchases.
One of the reasons Visa can outperform other financial stocks during and/or after a potential recession is its conservative operating approach that shuns lending. Because it focuses on payment processing and avoids lending, Visa doesn’t have to set aside capital to cover loan losses. This small but powerful difference from other financial stocks makes a world of difference and helps explain why Visa can sustain a profit margin of 50% (or higher).
Visa also has a knack for expanding its share in key markets. Following the Great Recession, Visa was the only one of the four major payment networks in the U.S. to significantly expand its share of network purchase volume. Today, more than half of all credit card network purchase volume in the U.S. routes through Visa.
Alphabet
The fifth and final safe stock to buy with $3,000 in 2023 is Alphabet (GOOGL) (GOOG), the parent company of internet search engine Google, autonomous vehicle company Waymo, and streaming platform YouTube.
In many ways, Alphabet looks like an outlier on this list. It’s the only one of the five companies that doesn’t pay a dividend, and it was absolutely steamrolled by the 2022 bear market. As of last weekend, shares of the company were down 38% (more than double the S&P 500’s year-to-date decline). However, Alphabet brings clearly defined competitive advantages to the table that should, in all likelihood, limit its potential downside in 2023 and provide ample upside for growth-seeking investors.
For starters, its internet search dominance is unmatched. At no point over the past three years has Google accounted for less than a 91% share of global internet search. This domination affords Google exceptional ad-pricing power and should allow this segment to continue to produce abundant cash flow.
Also, many of the company’s ancillary operating segments are still growing like wildfire in a challenging environment. Cloud infrastructure service segment Google Cloud produced 38% year-over-year sales growth in the September-ended quarter and increased its share of global cloud infrastructure spending to an estimated 9%, according to Canalys.
Best of all, Alphabet ended the third quarter with over $101 billion in net cash, cash equivalents, and marketable securities. This is an incredible cash buffer that’ll likely lead to share buybacks in the new year.
— Sean Williams
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Source: The Motley Fool