Is It Time to Buy the S&P 500's 4 Worst-Performing Stocks of 2023?

It's the beginning of the year, when many investors sell some winners and rotate into last year's underperformers.

Although the S&P 500 had a strong 24% gain in 2023, it wasn't all sunshine and roses for every stock. In fact, the worst-performing stock in the index last year fell by more than 50%.

But could this be an opportunity? After all, many technology stocks had a terrible 2022, only for the sector to surge in 2023, with the tech-heavy Nasdaq Composite up 43% on the year.

In 2023, it's interesting that the S&P 500's four worst performers were each in completely different sectors, spanning residential solar, agricultural chemicals, discount retail, and next-gen biotech. After their swoon, which of these beaten-down names look like the best deal today?

A diverse array of underperformance, but with similarities

The worst-performing stocks in the index were:

Data source: Finviz.

The stocks span all different industries, but there are actually a lot of similarities between them. Three of the four stocks had somewhat of a "boom" either during the pandemic or in the post-pandemic inflationary period, which subsequently turned to a bust.

For Enphase, it's a leader in solar microinverters, so it is highly levered to the health of the residential solar industry. As a big-ticket purchase, solar installations are highly sensitive to interest rates, as well as competitive utility rates. During the pandemic, interest rates were at rock bottom, and people were investing in their homes. Then after Russia invaded Ukraine, utility rates skyrocketed in Europe, leading to more demand there.

But both of those trends reversed at once in 2023, with long-term interest rates rising to a peak in October, and the energy shortage fears easing in Europe. That led to a violent cyclical downturn across the solar industry.

FMC had also benefited from rising crop prices as the result of the Russia-Ukraine war, and distributors double-ordered product amid supply shortages following the pandemic. But as supply became available, fertilizer prices went down, and interest rates rose, raising the costs of carrying inventory. Thus, distributors have been selling down inventory and not ordering new product. The result has been declining revenue and profit for FMC in the second half of the year.

Moderna of course developed the mRNA technology that enabled the first COVID-19 vaccines during the pandemic, so its revenue and profit boomed during that time. However, the tide has certainly turned in 2023. In fact, last quarter Moderna wrote off $1.3 billion in COVID materials as part of a $3.6 billion overall net loss, as the company continued "right-sizing" its manufacturing footprint. Moreover, the company expects revenue to decline from $6 billion to $4 billion next year, yet with increasing research and development costs.

Dollar General may be a bit of an outlier here. Certainly, in the post-pandemic period, consumers are switching from buying goods to experiences. But that doesn't account for Dollar General's relative underperformance compared with other discount retailers. Dollar General's descent started in June, when it reduced its full-year guidance for revenue growth and profits, and then lowered it again in August.

Buy the four worst-performing stocks for a rebound? Image source: Getty Images.

Which name has the best chance of turning around?

While some may be skeptical that last year's underperformers may be winners in 2024, I think all four of these stocks have a chance for positive performance in 2024.

In Enphase's case, the stock is already up 70% off its lows just in early November. That has been largely in response to the decline in inflation and long-term bond yields. Moreover, its CEO bought shares on the open market in November, too, and the company unveiled a cost-cutting restructuring plan in December. That seems to indicate optimism over long-term interest rates, which should theoretically allow for more purchases of residential solar systems and a new growth cycle. However, the industry is still depressed, so it remains to be seen if that optimism prevails.

FMC just initiated a restructuring program of its own in December, with the goal of cutting $50 million to $75 million of costs this year, and a goal of eventually reaching $150 million in cost savings from EBITDA (earnings before interest, taxes, depreciation and amortization) in the longer run. For reference, FMC management projects about $1 billion in EBITDA this year, down 29% from the prior year.

And eventually, distributors will have sold down their inventory to appropriate levels and begin ordering again. In fact, FMC has already guided for sequential growth in the current quarter. Meanwhile, the stock trades at an undemanding valuation of just 13 times earnings, with a 3.8% dividend.

Moderna investors do have somewhat of a high risk here, as the company has projected revenue declines in 2024. However, management expects revenue to return to growth in 2025 as its pipeline and R&D spending begins to yield results, and then to "break even" in 2026 as those sales begin to scale. Investors will have to monitor those 2025 efforts, which will be centered on other respiratory diseases like RSV and the flu.

Of course, Moderna also has larger ambitions, especially in oncology, as well as other diseases. While those will take more time, perhaps until 2028 or beyond, to become commercialized, progress is being made. On Dec. 15, the company announced promising clinical results of an early stage three-year cancer trial for mRNA therapy in combination with Merck's Keytruda.

Meanwhile, it appears Dollar General's problems have been due to some fundamental execution slip-ups in recent years, related to customer service, inventory management, and theft prevention. But the board replaced Dollar General's CEO with its former CEO, Todd Vasos, who retired in 2022. That's when some of the current problems apparently started cropping up, so there's certainly hope for a turnaround under the formerly successful leader.

Vasos has a plan to invest about $150 million in its employees this year, which he believes will go a long way toward improving customer service and inventory management. We'll see if it works, but there is a fairly low bar to clear. Dollar General now trades at 15.6 times earnings, a fair amount below its average of around 20 over the past 10 years and a 20-25 range over the past five years or so.

Which turnaround story is best?

Each of the four stocks has its pluses and minuses. Dollar General's perceived recession-resistant business and low valuation probably make it the least risky of the bunch, especially since it has a proven leader back at the helm. But eventually he will leave the post again, at some point.

FMC is actually the cheapest stock, but it's also subject to the swings of commodity prices, weather, and distributor behavior. Yet agricultural technology should only grow in importance over time, especially if climate change worsens.

Enphase is not especially cheap, at 29 times earnings. But the company has technology leadership in microinverters, allowing the company to charge a premium price and achieve higher margins than competitors amid the renewable-energy revolution.

Meanwhile, Moderna was certainly a pioneer in mRNA technology that changed the world during the COVID pandemic. Who's to say it can't be done with other diseases, such as cancer?

Enphase and Moderna probably have the most tantalizing long-term growth possibilities, but their valuations relative to their profits (or lack thereof) make them higher-risk as well. So for aggressive investors, Enphase looks to be my pick, while conservative investors may look to Dollar General as their contrarian pick in 2024.