This year has been a mixed one for markets - unlike 2022, where every S&P 500 Index ($SPX) subsector except for energy closed in the red. While the broader markets are still in the green for 2023, the rally hasn’t been particularly broad-based, and has been mostly carried by the first-half rise in tech names amid the optimism over artificial intelligence (AI).
Around half of S&P 500 constituents are in the red this year, and many more have underperformed the benchmark. While it is quite usual for some stocks to underperform the index, the dispersion in price action has been particularly stark this year, and the massive price moves in Big Tech names have somewhat masked the dismal returns from other sections of the market. Incidentally, the Nasdaq Composite's ($NASX) YTD outperformance over the Russell 2000 (RUT) is the highest since 1999, showing how tech names have led the rally even as other sectors have lagged.
Meanwhile, as we head into 2024, I believe Enphase Energy (ENPH) and Disney (DIS) are two underperforming S&P stocks that look like top buys for 2024.
Enphase Energy is Among the Worst-Performing S&P 500 Stocks
Solar stocks have swallowed heavy losses in 2023, and both Enphase Energy and SolarEdge (SEDG) are among the worst S&P 500 performers. ENPH has given up 70% of its value YTD.
The sell-off in Enphase stock is not hard to understand if you followed their recent earnings call - where the company not only missed Q3 earnings estimates, but also slashed their guidance, providing a dismal commentary on the near-term business outlook.
However, 2024 should be much better for this underperforming S&P 500 stock, as Enphase expects inventory stabilization to support an increase in its sales in the back half of next year. Interest rates - which have pressured several sectors, including solar - should also start falling in the back half of 2024 as the Fed starts its long-awaited pivot.
ENPH Looks Like a Top Stock to Buy for 2024
Lower interest rates should not only help increase sales for Enphase by increasing the affordability of its products, but would also support an expansion of its valuation multiples, which have plummeted amid the pessimism towards growth names.
Currently, Enphase trades at a next-12 months (NTM) price-to-earnings (PE) multiple of around 23x. While the multiple might look elevated if we consider the fact that analysts expect its revenues and EPS to fall in 2024, it looks more attractive after accounting for the company’s long-term growth story in the overall picture.
Enphase is profitable, has a strong balance sheet, and is generating free cash flows to support its growth. Continued expansion into new geographies, coupled with the launch of new products, should lead to a growth rebound once the supply chain inventories fall to normalized levels in 2024.
While the stock is at the bottom of the barrel for S&P 500 performers in 2023, I believe that this battered solar play could see much better days ahead in 2024.
Disney Stock Continues to Underperform in 2023
While Enphase’s underperformance is more of a new development in 2023, Disney has been a long-term underperformer, and this year it fell to the lowest levels since 2014.
DIS shares have lost around 27% over the last 5 years - and while they are up 20% in the last 10 years, that trails the performance of the S&P 500 by a wide margin.
While Disney shares have failed to create shareholder wealth over the last decade, I believe this underperforming S&P 500 stock is among the best buys for 2024. Here’s why:
1. Disney Has Expanded Its Cost-Cutting Targets
Cost cuts and “efficiency” were the buzz words of the year in 2023, as companies across sectors made aggressive belt-tightening moves. Meta Platforms (META) CEO Mark Zuckerberg even labeled 2023 as the “year of efficiency.” While the push for efficiency did wonders for Meta stock – it's the second best-performing S&P 500 stock this year – markets haven’t cheered Disney’s cost cuts as much.
Meanwhile, during the company's fiscal Q4 2023 earnings call yesterday, Disney further expanded the scope of cost cuts and said that now it is targeting structural cost savings of $7.5 billion – $2 billion higher than the previous forecast. These cost cuts should help improve Disney’s earnings in the coming quarters, and the markets should also eventually appreciate their impact.
2. Streaming Profitability
Disney’s streaming business has been a loss-generating venture, and has been eating into the profits of the hugely profitable Parks segment. During the fiscal Q4 earnings call, Disney reiterated that it expects its streaming business to become profitable by the end of the current fiscal year. As the streaming business becomes profitable, it should start adding to the bottom line, which should help in a rerating of DIS shares.
3. Reasonable Valuations
Disney shares trade at a NTM PE multiple of 19.5x. This looks reasonable, considering the expected profitability of the streaming business and the ongoing transformation under CEO Bob Iger, who is open to strategic actions like selling linear TV assets.
Plus, Disney is among the most iconic brands globally, and is the proverbial “cradle to grave” business as it has something to offer to every age group.
The stock has been a long-term underperformer, but I believe the company is now setting the stage for a rebound in 2024, as Iger tries to improve the company's earnings by shifting the focus from streaming subscribers to profitability.
On the date of publication, Mohit Oberoi had a position in: DIS , ENPH , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
