Times are tough right now for investors. This past year has been volatile and there's a lot of uncertainty heading into 2023.
One of the keys to successful investing during times like this is to focus on your highest-conviction stocks. These are companies you firmly believe can thrive no matter what's ahead. For three Fool.com contributors, some of their highest-conviction stocks for 2023 are Texas Instruments (TXN 5.64%), Brookfield Asset Management (BAM -1.04%), and NextEra Energy (NEE 0.54%). Here's why they believe these companies are well positioned for success in 2023 and beyond.
This tech giant touches everything
Reuben Gregg Brewer (Texas Instruments): I don't invest in technology stocks very often, but when Texas Instruments' dividend yield rose to historically high levels I couldn't help but take a closer look. At around 3% the yield is still very attractive. But what's really interesting is the company.
Texas Instruments makes the very simple computer chips that find their way into just about every digitally enhanced device. There's nothing particularly special about any of the chips, so they can be sold to an array of customers. Overall demand is the driving force, as more and more products add a digital component. For example, a food thermometer that connects to the internet, or a rechargeable drill, or a refrigerator. Sure, cellphones and computers, too, but it's all of the other things that are getting technology features added that's the real show. All in, Texas Instruments has around 100,000 customers to which it sells some 80,000 products.
The problem today is that the chip business is inherently cyclical and it's in a downturn. Eventually the industry will get back on its feet. Given the historically high yield, I'm happy to get paid to wait. But Texas Instruments isn't waiting, it's actually building new chip plants so when the upturn comes along it will be even better positioned than it is today. That's a winning game plan in my book and the same one that has led Nucor, a steel giant I happily own that invests in both good times and bad, to incredible results. I'm not a tech investor, but I'm all in on Texas Instruments.
Finally free and ready to shine
Matt DiLallo (Brookfield Asset Management): Over two decades ago, Brookfield Corporation shifted its resources to asset management. It's now one of the largest global asset managers, with over $750 billion of assets. However, the market never gave it much credit for the value it has created by growing its asset management business. Instead, it gave Brookfield a conglomerate discount due to its various operating businesses and insurance solutions capabilities.
Brookfield believes the sum of those parts is worth $82 to $94 per share. However, shares were trading earlier this year at half that level. That led the company to split off a 25% stake in its asset manager, Brookfield Asset Management, and distribute it to shareholders. By separating the company, the market can value the asset manager on its stable and rapidly rising fee-related earnings.
Brookfield believes its asset management business alone is worth $32 to $45 per share based on a multiple of 25 to 35 times its $2 billion of fee-related earnings. With the recently split-off shares trading at less than $30 a share, they're moderately undervalued.
However, that entity has significant embedded growth. Brookfield Asset Management expects its fee-related earnings to expand at a 15% to 20% annual rate for the next several years, powered by investment funds it has raised recently. That has the company on track to more than double its fee-related earnings in five years. Because of that, Brookfield Asset Management could be worth $71 to $94 a share by 2027.
In addition to that capital appreciation upside, Brookfield Asset Management appears poised to become a potent dividend stock. It recently set its payout, giving it a more than 4.4% dividend yield. Meanwhile, the company expects it to grow at a 15% to 20% annual rate for the next several years. That combination of above-average dividend income and strong stock price appreciation potential is why Brookfield Asset Management is one of my highest-conviction investments entering 2023.
A rare growth stock in a defensive industry
Neha Chamaria (NextEra Energy): Several economists now believe a recession in the U.S. is imminent in 2023, and these fears have triggered panic-selling in stocks across sectors. Yet, while it's not easy to see the value of your portfolio fall, you want to hold on to -- and even add to -- high-conviction stocks right now, rather than sell. Even better, stocks that can pay solid dividends even during uncertain times are the kinds you want to own in 2023. NextEra Energy is one of them.
As the largest utility in the U.S., it's easy to see why NextEra Energy could navigate a downturn if there is one. After all, it's a defensive business as the demand for electricity and gas doesn't fall much even if the economy falters, and that means such utilities can project earnings and cash flows years in advance. That also means they can plan how much in dividends they want to pay their shareholders.
So for 2023 and 2024, NextEra Energy expects to grow its adjusted earnings per share (EPS) by roughly 7% and 10% off its projected 2022 EPS, and then sees 6% to 8% growth for 2025 off its 2024 estimate. While that's impressive growth for a utility, here's the real number you must know: NextEra Energy expects to increase its dividend per share every year by almost 10% through "at least" 2024.
So one thing's assured: NextEra Energy will give you a dividend raise in 2023, and at the least, it'll likely be in the high single digits. Also, you pocket a 2% yield if you buy the stock now.
Of course, NextEra Energy's traditional utility business isn't the only catalyst here. The company is, in fact, a clean energy behemoth, and its clean energy arm had a whopping backlog of nearly 20 gigawatts as of the end of the third quarter.
All of this makes NextEra Energy a rare growth stock in a defensive industry, and once you know this, it's hard not to have conviction in such a stock for the year ahead.
