2023 has been a great year for the stock market. But as with all bull markets, many well-known stocks or even sectors can fail to participate in the rally. Owning an underperforming asset during a bull market can feel frustrating and can lead to fear of missing out, which can drive reckless investment decisions.
A better approach is to accept missed opportunities or sunk costs and focus on what matters most, which is achieving your financial goals. In practice, that means making the best decision you can with what you know by aligning your portfolio's allocation with your personal risk tolerance and investment objectives.
Let's look at some stocks that are sitting on the sidelines of the market's epic run. Plug Power (PLUG 1.26%), Dominion Energy (D -1.02%), and Honeywell International (HON 0.22%) are all down big from their highs.
Here's what's holding back each of these stocks, what needs to happen to turn them around, and whether or not each stock is worth buying or staying away from for the time being.
Image source: Getty Images.
Continue to keep Plug at arm's length
Scott Levine (Plug Power): Soaring nearly 16% since the start of the year, the S&P 500 continues to claw its way back from the 20% decline it suffered in 2022. Shares of Plug Power, on the other hand, have failed to stage a similar comeback. In fact, the fuel cell and hydrogen solutions specialist's stock plummeted 57% in 2022, and through the first half of 2023, it's down an additional 16%.
The major catalyst for the stock's slide over the past six months is the company's ongoing inability to generate a profit -- or even come closer toward it. Since its founding in 1997, Plug has excelled at growing its top line. Comparable growth on the bottom line, however, has failed to appear. Plug seemed to be headed in the right direction in 2021, posting a diluted loss per share of $0.82 after reporting a loss per share of $1.68 in 2020. Last year, though, the company incurred a steeper loss -- $1.25 per share -- to the chagrin of investors.
Management maintains that the company is headed in the right direction, and it remains steadfast in its belief that the company will generate operating income and operating cash flow of $850 million and $750 million, respectively, in 2026. Here's the rub, though. This isn't the first time that management has made bold bottom-line predictions. It has repeatedly posited that the company was on the cusp of profitability, and it has repeatedly failed to make good on its projections.
Until the company does deliver, therefore, investors should continue to sit back and watch from the sidelines.
This high-yield utility stock is worth a look
Daniel Foelber (Dominion Energy): 2023 has not been kind to utility stocks, and regulated electric utility Dominion Energy is no exception. After all, who wants a high-yielding dividend stock when growth stocks are producing monster gains seemingly overnight?
But for investors who are skeptical of a sustained market rally in the back half of the year, or simply don't want to chase stocks with expensive valuations, Dominion Energy may be worth a look.
The stock has gotten absolutely crushed as of late. The sell-off has been so bad, in fact, that Dominion reached a 10-year low earlier this year and is currently trading less than 10% off that low as of the time of this writing.
The main culprit for the sell-off is that the company is a flurry of restructuring actions and asset sales over the last few years. Dominion is now almost entirely a regulated utility, which should be a stable business that supports dividend growth. However, it is also making a major bet on offshore wind energy.
The company's 2.6-gigawatt project known as the Coastal Virginia Offshore Wind (CVOW) project is expected to begin construction in 2024 and enter service by year-end 2026. The installed cost alone is expected to clock in at $10 billion. Tax credits should help bring the levelized cost of electricity (LCOE) down. But even then, offshore wind projects have a higher LCOE than onshore wind or combined cycle natural gas power plants.
Dominion Energy is in limbo. Its offshore wind investments remain unproven. However, the stock is worth a look given how far it has sold off, paired with the stock's whopping 5.2% dividend yield.
Although Dominion Energy probably could have handled its restructuring better (and sold certain assets at more opportune times), there's a lot to like about its long-term decisions if you are a proponent of the energy transition. Selling off its oil and gas assets and bolstering the renewable portion of its electricity portfolio makes Dominion a cleaner company. The company has committed to being net-zero by 2050 and has reduced methane emissions from gas operations by 38% since 2010.
Analyst consensus estimates for 2023 earnings per share are $3.32, which would give Dominion an attractive price-to-earnings ratio of just 15.8. Add it all up, and buying Dominion Energy stock at this price makes a lot of sense, especially in a market where bargains are harder to come by.
Honeywell's future looks bright
Lee Samaha (Honeywell): It might seem an overstatement to claim that a 2.8% decline in 2023 is "down big," but it represents a nearly 19% underperformance compared to the S&P 500 index.
The disappointing move certainly doesn't come down to earnings momentum. After all, Honeywell easily trumped its first-quarter guidance with sales growth of 8% (compared to guidance for 1% to 5%) and adjusted earnings per share (EPS) of $2.07 (compared to $1.86 to $1.96). In addition, management raised its full-year guidance to organic sales growth of 3% to 6% from a prior range of 2% to 5% and adjusted EPS to be $9 to $9.25 compared to prior guidance of $8.80 to $9.20.
Moreover, many of its businesses have excellent near- and long-term growth prospects. Its aviation business is enjoying a sustained recovery in commercial aerospace, its performance materials and technologies business is benefiting from an improved environment for energy-related capital spending, and its building technologies continue to beat expectations with solid underlying demand for its sustainable and energy-efficient solutions for buildings.
Thinking longer-term, the company has a host of growth initiatives in play that should come to fruition in the coming years, including quantum computing investments, ongoing investment in cloud-based software solutions, sustainable technologies (green fuels, carbon capture technology, etc.), and avionics and propulsion systems for air taxis and delivery drones. So what's the problem with the stock price?
It boils down to a combination of valuation, uncertainty, and the unexpected CEO transition. Despite the stock price decline, Honeywell trades on 22.5 times the high end of its earnings guidance.
That said, the company's excellent growth prospects are still in place. Management estimates it has available cash and debt capacity of $24 billion to $27 billion through 2025, which could be used to fund share repurchases or toward mergers and acquisitions (M&As).
In fact, former CEO Darius Adamczyk has become the executive chairman with an intent to focus on M&A. As such, it's well worth keeping a close eye on the company because it looks like Honeywell is about to buy growth through acquisitions. Watch this space.
