When a stock hits a new all-time high, it's usually a strong indicator that the business is executing well. However, after the terrible performance of many stocks in 2022, there might not be many stocks setting records in 2023.
The basic math is that if a stock falls by 50%, it must double to reach its previous mark. With many stocks down that much or more, the list is short for stocks that have the potential to hit new highs.
I think two stocks that could do so this year are Visa (V 0.33%) and MercadoLibre (MELI -1.79%).
To reach a new top, Visa's stock would need to rise to $251 from about $225 today, and MercadoLibre must reach $1,985 from $1,131. That means Visa and MercadoLibre must rise about 12% and 76%, respectively.
So how will each company achieve that? Let's find out.
1. Visa
Visa has a much lower hurdle to clear than MercadoLibre does. The payment processor had a strong fiscal-year 2022 (ended Sept. 30), with net revenue rising 19% and earnings per share (EPS) up 13% in the fourth quarter. Its business model is simple: A consumer uses one of its branded cards, and Visa scrapes a small amount from each transaction. Therefore, the more consumers spend, the more money Visa makes.
With the economy slowing, the line of thinking is that Visa's revenue growth should moderate. However, the average analyst pegs Visa's 2023 fiscal-year revenue growth at 8.7%. Why? It's probably management's bullish outlook.
In its fourth-quarter earnings call, management said it didn't factor an "economic downturn or recession" into its projections because it plans for the "medium and long term." Clearly, Visa might see some growth slowdown, but it doesn't see its numbers going negative, which is why the stock could hit a new all-time high in 2023.
Currently, Visa's forward price-to-earnings ratio (P/E), which uses projected earnings, is 27. While that might seem high to some, Visa's huge profit margins earn it a premium valuation. Additionally, it's also below its decade-long average P/E of 34 times earnings.
If Visa meets its earnings forecast and returns to its decade-long valuation, that implies a 29% gain by the end of 2023. That's almost double what it needs to pass it old high. With how well Visa is executing, the stock remains a strong buy.
2. MercadoLibre
I know what you're thinking: How in the world is MercadoLibre going to return 86% in one year? Well, it goes back to the valuation argument.
MercadoLibre, Latin America's e-commerce leader, has been around the public markets for a while. That gives investors a considerable track record to examine what an average valuation should be. Because MercadoLibre isn't trying to maximize profits, we'll use its price-to-sales (P/S) ratio.
MELI PS ratio data by YCharts
As you can see, MercadoLibre has been trading at its lowest levels since the depths of the Great Recession in 2008 and 2009. However, if you look at its financial results, it paints a clear picture: The company's performance is excellent. In the third quarter, total revenue rose 61% to $2.7 billion. Furthermore, its fintech division shined, with revenue rising 115% to $1.2 billion.
It also saw gross and operating margins widen in the fourth quarter, which is why its current low valuation doesn't make much sense. Could it be the 2023 projections? Nope. Analysts expect revenue to grow 22.6% in 2023, with EPS growing even quicker at 70%.
The reality is that MercadoLibre shares sold off with its e-commerce and payments brethren when the COVID stimulus subsided in the U.S. But it didn't experience the same business slowdown in Latin America, and now it is now substantially undervalued.
By returning to a P/S of 10.4 (still below its all-time average) from today's 5.6, MercadoLibre would set a new all-time high stock price. That doesn't even include the growth MercadoLibe is expected to record in 2023.
Although MercadoLibre's recovery might extend beyond this year, the stock will likely see a strong rebound in 2023. Visa's bar is a lot lower, and I won't be shocked to see it achieve new highs in 2023. Regardless, both stocks are strong long-term buys, and investors should consider purchasing them now before they recover.
