With the first three months of the year behind us, it’s now earnings season. Accordingly, investors looking for strong buys have a list of companies to choose from. At least, a list of companies that outperformed expectations on the earnings front.
Markets tend to immediately reward companies that report earnings with positive surprises. Of course, investors who did not buy in ahead of earnings will likely pay more for companies that beat earnings today.
However, investors shouldn’t always look for a discount on stocks. Companies are worth the higher price if they forecast a stronger-than-expected outlook. Their resilient business should continue to out-perform, despite the economy getting weaker. Accordingly, there’s a premium to be paid right now for stability and defensiveness. Earnings beats just add to the story.
I think focusing on a diverse group of sectors is important. Accordingly, for those seeking portfolio diversification, I’ve listed stocks from a wide range of sectors. These are companies with margins of safety is big enough to compensate investors for the risk of holding their shares. That is, for those concerned about a recession on the horizon.
Without further ado, here are the top seven strong buys I think are worth considering, following these companies’ strong earnings.
|International Business Machines
|Johnson & Johnson
|Procter & Gamble
International Business Machines (IBM)
International Business Machines (NYSE:IBM) posted first-quarter results demonstrating its strength in its open hybrid cloud and artificial intelligence for the enterprise segment. IBM’s revenue grew slightly, up 0.4%, to $14.3 billion. However, the software, consulting, and infrastructure supplier giant expects a strong year. Free cash flow will increase by $1 billion year-over-year to $10.5 billion, if the company’s forecast is correct.
On the conference call, IBM recognized the geopolitical challenges in China. Fortunately, the company benefited in the first quarter from strength in Europe. Since technology is a deflationary force, it encourages corporate customers to implement tech-driven solutions. This will counter various forms of inflation, and lessen the sting of higher interest rates.
IBM investors may count on steady demand for its software. The company’s business-to-business segment is not sensitive to inflation, compared to the B2C segment. In its infrastructure segment, I think the product cycle headwind will rebound. That’s partly due to IBM’s increasing focus on the utilization of AI technology.
The industry will need tools that may interpret heavy amounts of data. IBM has been involved in AI technology for a long time, and could eventually be a leader in this space.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is a consumer discretionary mega-cap company that raised its guidance for the year. In its Q1 report, Johnson & Johnson also posted healthy revenue and earnings.
J&J posted a 5.6% increase in sales to $24.75 million. Importantly, it put its legal claims in the rear-view mirror, taking a one-time charge of three cents per share. Chief Financial Officer Joe Wolk said that despite the cases against it, J&J stands by the safety of its cosmetic talc. It has decades of independent research that government agencies conducted.
Investors in JNJ stock may want to look past the litigation that’s hung over this stock for so long. Instead, investors should focus on its business momentum. The company will benefit from a rebound in procedures. Those volumes are already tracking well above pre-Covid levels. In the second half of 2023, expect operating margins to expand. Further, J&J has investment opportunities to strengthen its future.
Finally, in its drug segment, J&J has a number of developments, including biospecific antibody products treating diseases as multiple myeloma, worth watching.
Morgan Stanley (MS)
Morgan Stanley (NYSE:MS) reported a slight revenue decline of 1.9% year-over-year to $14.52 billion. However, the company’s return on average tangible common equity of 16.9% and standard equity Tier 1 Capital ratio (“CET1”) of 15.1% of the data points that matter.
Morgan Stanley’s strong CET1 buffer should bolster the market’s confidence in Morgan Stanley. Notably, this mega bank is also ready to raise its capital if regulators come out with stricter stress tests.
With strong ROTCE, the firm is in a good position from here. It will expand its margins by cutting costs, while rewarding shareholders. For example, the company has continued to return capital to shareholders via buybacks, reportedly buying back $1.5 billion of common stock. That’s saying nothing of the bank’s 3.5% dividend yield.
Amid uncertain stock market conditions, Morgan Stanley’s customers increased their cash on hand with sweep deposits. Still, this is running below 4% of assets under management, so it will not pressure profit margins.
Investors should take advantage of tax payment season, which pressures deposits, to potentially hit MS stock. Once the bank’s assets under management rises again, the stock should trade higher.
Netflix (NASDAQ:NFLX) fell slightly after posting Q1 results on April 18. However, the numbers weren’t all that bad. The streaming giant’s revenue grew 3.7% year-over-year to $8.16 billion. The company reported that it expects its operating margins to expand, and also expects to report at least $3.5 billion in free cash flow this year.
I think those numbers are pretty darn solid.
Netflix increased user engagement in India by increasing net paid additions by 30% year-over-year. This is due to a price cut in Dec. 2021. However, across its entire business, the company’s password-sharing crackdown resulted in an initial cancel subscription reaction.
Loyal customers will keep their Netflix, and have. But this short-term dip is one that many may not have liked to see.
I think that over the long-run, Netflix has many levers to pull to grow its business. It may increase its advertising efforts, or reinvest in content. Great entertainment will boost member satisfaction, which will, in turn, attract more subscribers.
Procter & Gamble (PG)
Procter & Gamble (NYSE:PG) stock popped after posting substantial revenue. It also raised its sales growth and cash return guidance. In its third quarter, P&G reported revenue growth of 3.5% year-over-year to $20.07 billion. It increased its fiscal 2023 all-in sales growth by 1%.
P&G is in good shape to bounce back to pre-Covid business growth. The company realized cost savings and has been working hard to identify new growth opportunities.
CFO Andrew Schulten said that inflation-related costs are on the rise. Accordingly, the company expects to see costs increase in the order of $125 million. However, since the company is in a good position relative to its peers, it may borrow with favorable terms. This will keep it competitive.
P&G will sustain strong profitability by seeking value-creating investment opportunities. Innovations in its product and packaging business, and optimization across its communications and marketing businesses should assist in this growth. Expect strong retail execution to sustain consumer demand levels. Return on investment will rise as a result.
Charles Schwab (SCHW)
Charles Schwab (NYSE:SCHW) is a discount brokerage firm. After fears of a bank run peaked in March, SCHW stock fell. This is a stock to buy now, after the company posted 93 cents per share in earnings, as revenue rose 9.6% year-over-year to $5.12 billion. This represents a significant revenue beat.
The company’s revenue strength is impressive. In the first quarter, clients turned their investments into cash. However, bank deposits shrank by 11% year-over-year.
Schwab will pause its stock buyback. This might allow for near-term downside, as buying pressure ceases from the company. However, the trade-off is worthwhile. CFO Peter Crawford said the company will strengthen its balance sheet to support its long-term growth. Previously, it increased its common dividend by 14% to 25 cents a share.
Schwab must work through acquisition and integration costs of $98 million last quarter. It will slow revenue growth in Q2 to the mid-to-upper single-digit percentage points. Schwab did not change long-term margin targets. Net interest margins are likely to improve steadily through 2024.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is a leading semiconductor manufacturer. In Q1, the company reported that 5-nanometer chips accounted for 31% of its total wafer revenue. Advanced Technologies, defined as 7-nanometer and more advanced technologies, accounted for 51% of its revenue.
TSM acknowledged the soft PC and smartphone market. This will slow N6 and N7 sales. However, radio frequency, WiFi, and connectivity use that technology. Demand is steady, and will get healthier as the industry recovers.
Strong automotive demand remains, but experts suggest this market should soften in the second half of 2023. However, the firm expects an uptick in AI-related demand. This will offset excess inventory in its other businesses.
Looking ahead, 3-nanometer and 2-nanometer manufacturing are growth catalysts. TSM is the first to bring 3 nanometer high-volume production. This expands its moat, decreasing the likelihood of competitors catching up.
Of course, 2 nanometer chips are the most advanced technology in the industry. Once TSM starts mass-producing these chips, its leadership will expand again. Taiwan Semiconductor is securing its lead for several years from now.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.