Many investors understandably want to buy stocks that have already gone down by a lot. It seems logical that underperforming stocks are due for a rebound. But it's important to note that this doesn't always happen.
Look at the worst four stocks for the S&P 500 in 2022: Generac Holdings, Match Group, Align Technology, and Tesla. Match Group stock was down 69% in 2022, but it's still down another 18% in 2023, as the chart below shows.
While Match stock is down, the others have performed better. Shares of Align and Generac are performing roughly in line with the market, and Tesla stock has been a huge winner. If investors had started the year with an equally weighted portfolio of these four stocks, they would have crushed it in 2023.
The point I'm making, however, is that stocks can drop more even after they've had a bad year. Therefore, investors can't just pile into the losers of 2023 expecting good things in 2024. They still need to be choosy with their investments.
As of this writing, the four worst S&P 500 stocks in 2023 are Enphase Energy (ENPH 3.80%), FMC Corporation (FMC 1.14%), Moderna (MRNA 1.69%), and Dollar General (DG -0.41%). (SolarEdge would have made this list, but it was removed from the S&P 500 index this month because of how far it's fallen.)
The drops for these four stocks are particularly painful this year because the S&P 500 is having a great year overall. The chart below shows just how wide the performance gap is.
Having looked at all this important context, I can now turn my attention to handling these four companies on an individual basis.
1. Enphase Energy
With products that aid the adoption of solar power, Enphase's business is riding a powerful trend higher. Trailing 12-month revenue is up more than 750% over the last five years.
However, Enphase only expects to generate $325 million in revenue in the upcoming fourth quarter at the midpoint of its guidance. This would represent a year-over-year drop of over 50% -- its largest year-over-year pullback by far.
Given the high cost of adopting solar, this market can be driven by interest rates -- people take out loans to get solar panels. But with rates higher, solar projects are slowing down. The risk for Enphase would be that demand for its microinverters and batteries evaporates further, forcing it to lower prices to stimulate demand. Lower prices would lower profitability.
However, there's more to Enphase than meets the eye. Management expects the big drop in revenue in Q4 because it's intentionally not building up inventory in certain markets where demand is weak. Preemptively lowering inventory can actually be a margin-preserving move, which would bode well for the business.
Assuming its current headwinds are just from normal cyclicality in solar, Enphase could be in a great position to rebound when demand picks back up. Whether demand will pick back up in 2024, however, is another matter entirely.
2. FMC
FMC calls itself an agricultural sciences company, selling pesticides, fertilizers, and more around the world. With a growing world population, the need for these products is only increasing. However, like Enphase, FMC is working through some (hopefully) temporary challenges related to elevated inventory.
For full-year 2023, FMC expects about a 21% drop in revenue compared to 2022. Adjusted profitability is expected to nose-dive by almost 50%. In an investor presentation, CEO Mark Douglas said: "The crop protection market is working through the most severe channel destock ever on record."
Looking further ahead, FMC's management doesn't anticipate lasting issues. For 2023, it expects revenue of $4.72 billion, at most. But by 2026, the company believes it can generate revenue of $5.5 billion to $6.0 billion as it moves past the current de-stocking headwinds.
As of this writing, FMC stock trades at about 1.5 times its trailing sales. That's a steep discount to its 10-year average valuation of 2.7 times sales. Therefore, it's easy to see upside for this stock as its outlook improves and its valuation normalizes.
3. Moderna
Moderna went from about $50 million in revenue to over $22 billion in revenue in just two years. Its vaccine for treating the coronavirus catapulted this company into the limelight and into the S&P 500. But as we move further past the pandemic's height, the company's revenue stream is starting to go down.
It was only logical that Moderna's revenue would pull back. The company expects sales of $6 billion in 2023 and only $4 billion in 2024 -- a far cry from its peak. It's also unprofitable now with a year-to-date net loss of $4.9 billion.
Moderna has a net loss because it's gearing up for act two, and three, and four, and so on. The company is spending heavily on research and development and has a whopping 15 new drugs in development.
Profitability will be hard to come by for Moderna until it gets another hit drug. But the good news is that it's well-capitalized in the meantime. And even though it's currently burning cash, management still anticipates having $6 billion to $7 billion in cash in 2025.
Moderna is probably the most speculative turnaround play for 2024 of these four stocks -- investing in biotech stocks can be hard. That said, it could have the most long-term upside, depending on how many drugs are approved and how long it takes to get them across the approval finish line.
4. Dollar General
Finally, I've arrived at Dollar General, which I believe has the best chance of any of these four stocks to outperform the market average in 2024.
Two foundational facts underpin my Dollar General investment thesis here. First, Dollar General's revenue is at an all-time high. Second, with a price-to-sales ratio of 0.7, its valuation is within spitting distance of its lowest ever. In other words, business is good but the stock has never been cheaper. That's a good combo for investors today.
DG Revenue (TTM) data by YCharts
That said, Dollar General does have problems. But the problems are operational and consequently fixable. Overstocked inventory is leading to markdowns, theft, and damaged goods. All three hurt profits. Accordingly, diluted earnings per share through the first three quarters of 2023 were down almost 26% from the comparable period of 2022.
Aware of its issues and having returned Todd Vasos back to his CEO position, Dollar General is in a solid position to have its profit margins bounce back, which should lead to a recovery in the stock price. It's already bounced back about 26% from its low in 2023. But 2024 could see more upside as it corrects its inventory problem.
