Many experts have a bleak forecast for the stock market early next year.
That’s because short-term interest rates will likely continue to rise, inflation will likely stay elevated and the economy will likely weaken.
So there are some stocks you may want to avoid. Morningstar lists three of them.
Its analysts like companies that have durable competitive advantages, or what they call moats. “These types of companies have more resilience in the face of economic uncertainty than companies that don't have significant competitive advantages,” Morningstar investment specialist Susan Dziubinski wrote in a commentary.
But the Morningstar list consists of companies that “don’t have economic moats, are facing headwinds in the current economic climate, and look overpriced to us,” she said.
“Given their prices and economic vulnerability, we think these stocks are ones to cut loose going into the new year.”
Old Dominion Freight Lines (ODFL), the fourth-largest less-than-truckload carrier by revenue.
Morningstar analyst Matthew Young puts fair value for the stock at $201. It recently traded at $294.
The company is the “clear industry leader in terms of execution, freight selection, and service quality, which is no small factor for shippers,” he wrote in a commentary.
“That being said, freight demand is moderating as goods spending continues to shift to services, and inventory restocking diminishes,” Dziubinski said.
It’s moderating “especially among retail end markets, easing retailer restocking,” Young said. “We look for tonnage to decline in the low single digits (year over year) in the second half of the year.”
GlobalFoundries (GFS), a semiconductor maker. Morningstar analyst Abhinav Davuluri puts fair value for the stock at $45. It recently traded at $64.
“We like that 38% of the firm’s customers are under long-term agreements, with a total value over $27 billion, which offers visibility into future revenue growth and increases customer switching costs,” he wrote in a commentary. “GlobalFoundries is benefiting from richer content in smartphones.”
But, “management expects macroeconomic and geopolitical uncertainty to negatively impact the firm’s sales in the first half of 2023,” Davuluri said.
“We suspect the negative impact could last longer, though we still expect GlobalFoundries to grow its top line in 2023 thanks to new design wins and improved wafer pricing.”
CF Industries (CF), a leading producer and distributor of nitrogen fertilizers. Morningstar analyst Seth Goldstein puts fair value for the stock at $85. It recently traded at $100.
“We think the market is forecasting higher nitrogen prices for longer,” he wrote in a commentary. “However, we point to declining prices of European natural gas, which is the feedstock used by marginal cost producers, as the driver for nitrogen prices to fall further back to our midcycle forecast.”
Nitrogen prices have fallen more than 30% since reaching a multi-year high during the second quarter, Goldstein noted. To be sure, while he expects prices to fall further in the coming years, he raised his mid-cycle price forecast by 9%.
