Nasdaq Leaps Back to the Forefront
Posted: March 30, 2023
March 20, 2023 (Maple Hill Syndicate) – Like a race-car driver slicing in front of the competition, the Nasdaq Stock Market has resumed market leadership in 2023.
This year through March 17, the Nasdaq Composite Index has returned 11.1%. The New York Stock Exchange Composite Index has fallen 3.8%.
The most widely watched market gauge, the Standard & Poor’s 500 Total Return Index, has inched up 2.4%. The Dow Jones Industrial Average has lost 3.5%. All figures are total returns, including dividends.
Nasdaq is known as the home of most large technology companies, and of a variety of smaller stocks. The NYSE, or Big Board, is home to most large companies except for technology and biotech firms.
Will the Nasdaq continue its comeback, after a dismal 2022, when it lost fully 33.1% of its value? I think so, but it will probably be a bumpy ride.
Strengths, Weaknesses
The technology sector, the heart of the NASDAQ, has one huge advantage and two disadvantages. The advantage is that many of the world’s most innovative companies are U.S. tech firms.
A disadvantage is that the tech sector has lost the temporary boost it got from the Covid-19 pandemic. Another headwind is rising interest rates, which are harsh on relatively expensive stocks.
The reason is simple. Say you expect Microsoft (MSFT) to earn $25 a share in fiscal 2028. If interest rates are 2% that’s worth about $22 now. If they’re 6%, it’s worth less than $18.
I don’t believe that the Federal Reserve is finished raising interest rates, but I think it’s nearly done. I am starting to beef up technology holdings in client portfolios, after cutting them in the past year.
Stock Picks
Here are four Nasdaq stocks that look like good values to me now.
Amkor Technology Inc. (AMKR), a mid-sized company based in Tempe, Arizona, does packaging and testing for semiconductor companies. About one-third of its business is in the U.S. The rest is in China, Ireland, Japan, Malaysia, Taiwan, Singapore and other countries.
Since I believe the risk of a recession is fairly high in the U.S. this year, I like Amkor’s international diversification. The company has shown impressive growth for the past decade, yet its stock sells for a modest valuation, eight times earnings.
I recommended Encore Wire last year and will do so again this year. It’s a mid-sized company based in McKinney, Texas, that manufactures electric building wire and cable.
Prosaic business? Sure. But Encore has grown its revenue at a 9% annual clip for the past decade, and faster lately. The stock sells for a mere five times earnings.
With trepidation, I also recommend Taylor Morrison Home Corp. (TMHC) a homebuilder based in Scottsdale, Arizona. There are good reasons to be scared of homebuilders, notably the recent rise in mortgage rates. But there are positives, too.
Home prices are high, reflecting a backlog of demand. And with the stock selling at only four times recent earnings, I think the potential headaches are already pretty well reflected in the stock price.
I also like Cirrus Logic Inc. (CRUS), a chip maker specializing in voice chips. I discussed Cirrus in a February column on stocks with powerhouse balance sheets. The Austin, Texas, company has debt equal to only 9 percent of the company’s net worth – a very strong ratio.
Cirrus sells for 18 times earnings, a little more than I am usually willing to fork up. This time I am willing, as the company has grown both sales and earnings at about a 12% annual pace for the past decade.
Track Record
Every year around this time, I recommend a few Nasdaq stocks. In 16 tries, my picks have averaged a one-year total return of 18.9%.
That compares well with the 16.0% average return for the Nasdaq Composite Index over the same periods, and the 11.9% average return for the Standard & Poor’s 500 Total Return Index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
A year ago I offered five recommendations. The best performers were Encore Wire Corp. (WIRE), up 32%, and Olympic Steel Inc. (ZEUS), up 29%. The worst was Alphabet Inc. (GOOGL) down 25%. I had moderate losses in Diamondback Energy Inc. (FANG) and Apple Inc. (AAPL).
Overall, my picks from last year were up 5.1% while the S&P 500 was down 10.7%.
Disclosure: I own Alphabet, Cirrus Logic and Diamondback Energy personally and for most of my clients. I own Amkor Technology and Encore Wire personally and for some clients.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.