The stock market has enjoyed a phenomenal 2023. And while it can seem counterintuitive to buy a stock at a higher price today than it was just a few months ago, sometimes that's the exact kind of decision that leads to outsize returns.
There's a fine line between buying a red-hot stock because it could keep going up and buying a stock because the fundamentals suggest that the company is still worth investing in. Apple (AAPL -0.35%), Baker Hughes (BKR -1.38%), and nVent Electric (NVT 1.68%), are three businesses at the top of their game and have a bright future ahead of them. Here's why each is worth buying in August.
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The perfect business model
Daniel Foelber (Apple): After passing the $3 trillion market-cap threshold, Apple stock found itself knocking on the door of the $200 mark.
After its post-earnings sell-off on Friday, Apple is down more than 5% in the past week. But zoom out, and you'll see that Apple has still had an incredible run so far this year and shows so signs of slowing down.
Apple has been one of the most resilient tech stocks during the 2022 sell-off. The story over the past five years has been to never bet against Apple. And in many ways, Apple is on the short list of companies that truly deserve to live up to the hype for one simple reason -- Apple is an impeccable company and brand, and it rewards its shareholders.
During Berkshire Hathaway's annual shareholder meeting, Warren Buffett called Apple "a better business than any [other] we own." It's hard to argue against that statement. We all know about the Apple business model. The company's ecosystem is a textbook example of vertical integration, and the brand is synonymous with blending design and functionality.
What Apple has done really well is expand that ecosystem through more products and services. Think Apple Watch and AirPods among the former and Apple Podcasts, Apple TV+, Apple Music, and Apple Pay among the latter. It looks a lot like Amazon's business model, but the difference is that Apple has far more control over hardware and software, allowing it to integrate its solutions into -- you guessed it -- its ecosystem. It's not just expanding for the sake of expansion. For the most part, it's improving the accessories and tools that people can use to make their iPhone more useful and fun.
What makes Apple a particularly compelling stock isn't just its well-oiled machine of a business model. It's also the company's history of not overspending and of buying back its own stock. Apple stock is up more than 300% over the past five years, so it's safe to say buying back stock was a good use of capital. In that time frame, Apple spent a staggering $385.9 billion repurchasing shares -- which is roughly the combined market cap of Netflix and Advanced Micro Devices.
Buying back stock reduces the outstanding share count and permanently boosts earnings per share (EPS). In this vein, Apple grows its EPS using two levers -- traditional earnings growth through the business and "artificial" earnings growth by buying back stock. This strategy essentially doubles down on the business. In the case of Apple, doubling down has been a genius move.
Sustained EPS growth is what has allowed Apple stock to sport a 32.8 price-to-earnings ratio despite quadrupling in the past five years. It's not a dirt-cheap valuation. But it's more than fair, considering the run Apple stock has had.
Apple stock isn't the bargain it was a few years ago, but it's still a stock worth buying and holding because of its top-tier fundamentals.
Baker Hughes has plenty of long-term growth prospects
Lee Samaha (Baker Hughes): After a period of underperforming peers such as SLB and Halliburton, oil equipment and services company Baker Hughes has come roaring back in 2023, and its 21%-plus gain makes it the only one of the three to beat the S&P 500 index this year.
While there are signs of slowing spending in the North American onshore upstream market, as noted by both Baker Hughes and Halliburton, Baker Hughes has many other levers it can pull. In fact, management raised its full-year sales guidance for its oilfield services and equipment segment despite acknowledging slowing conditions in North American upstream spending. In a nutshell, its international and offshore sales are more than offsetting weakness elsewhere.
In addition, the company's exposure to liquefied natural gas and gas technology is paying off, with management raising its forecast for industrial and energy technology orders in 2023 by $1 billion to a range of $11.5 billion to $12.5 billion. Within that, new energy orders -- including hydrogen, carbon capture, and CO2 compression -- are expected to grow to a range of $600 million to $700 million, compared with $400 million in 2022, a sign that Baker Hughes has a major role to play in the clean-energy transition.
On top of that, management has completed the restructuring actions necessary to generate $150 million in annual cost cuts and held out the prospect of more to come. With the price of oil now back above $80 a barrel, the environment remains favorable for energy companies, and Baker Hughes stands well placed to benefit from it.
nVent Electric will benefit from the astronomical growth of artificial-intelligence businesses
Scott Levine (nVent Electric): After reporting surprisingly strong fourth-quarter 2022 financial results in February, nVent saw its shares soar. The company's financial results for the first and second quarter of 2023 have provided investors with further causes to celebrate, helping the stock to rise more than 38% year to date, while the S&P 500 has risen about 19%.
Providing a wide variety of products to ensure safety and efficiency in electrical systems, nVent Electric is well positioned to prosper as businesses increasingly embrace electrical solutions. According to a 2020 article from Deloitte, "Most industrial manufacturers are just beginning to realize the economic viability of electrification in industrial fleets, processes, and spaces." It's the accelerating interest in artificial intelligence (AI) that provides another opportunity -- one that nVent is taking advantage of thanks to its recent acquisition of Texa Industries.
Because of the massive amounts of computing power that AI uses, data centers require extensive cooling solutions to keep them operating efficiently. Management singled this point out on the company's recent Q2 2023 conference call, stating that "artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments in the back half of the year to drive future growth in our data solutions business."
This is where Texa Industries comes in. The newest addition to nVent Electric provides advanced liquid cooling solutions that are ideally suited for data centers -- solutions that provide up to 50% energy savings compared to legacy cooling. According to nVent Electric, only 5% of data centers currently use liquid cooling, which is growing three times as rapidly as legacy cooling.
