Price-earnings ratios point to recession. But the multiples said similar things in 2022. So how long can the multiples stay this low? We have all read dozens of articles about what 2023 will bring us. I think most are sincere. Their only downside, as usual, is that they don’t touch stocks themselves. They could say that the S&P 500, which currently trades at 18 times earnings, could fall to 16 times earnings even if earnings remain relatively stable. Or they could say that if the closing interest rate is 5% on the Federal Reserve’s Fed Funds rate, we could get 14 times the profit. But these analyzes don’t tell you how they arrived at that S&P target. So I want to attack the S&P target thesis by looking at a few stocks that indicate the futility of the projections. Let’s start with two stocks: Johnson & Johnson (JNJ) and Nucor (NUE). Pharmaceutical giant J&J, one of my favorites in the Club portfolio, is trading at 18 times expected earnings for 2023. And I think that’s a reflection of a recession coming, given that earnings shouldn’t be be harmed by a delay. If we get into a recession, the stock will trade higher, not lower, as a recession would likely mean the end of the Fed’s rate hikes. Now let’s take Nucor, the world’s best steel producer. It is expected to earn $28 per share this year and fall to $12 per share next year as a likely recession continues. I’m having a hard time with the 4x earnings it’s currently trading at, but it’s clear the stock market is gearing up for a serious recession that would see Nucor’s earnings more than cut in half. But where does that income come from? The biggest revenue sector will be infrastructure, which, instead of taking a hit, should move higher given new federal government spending next year. Those infrastructure spending includes everything from bridges and tunnels to buildings, which Nucor dominates. Then Nucor also has a large exposure to oil and gas through its pipeline and heavy equipment business. At the same time, the industrial Caterpillar (CAT) is selling at 18 times earnings due to demand. That mocks Nucor’s 4 times. With those end markets and with CAT’s dramatically higher multiples, there has to be something to offer. Something’s wrong. I think it’s Nucor’s earnings estimates for 2023 — they’re too low. My point is you have the most cyclical stocks trading like they’re falling apart, but the heavier traditional cyclical stocks are trading not only higher, but much higher. My conclusion is that JNJ is “right” on what it sells for, Caterpillar and the like are probably a little wrong – too high, but still in the mix – and Nucor and the like are just dead wrong. So why don’t we buy Nucor? Because I think it can go lower. Meanwhile, the automotive sector is looming, and auto is seen as something that will collapse next year as demand declines. I think the market is seriously misjudging that statement. People have put off buying because cars and trucks are unnaturally overpriced, because of supply constraints and higher interest rates. Ultimately, I think cars will stay strong in a recession. Therefore, Ford (F) is the best compromise, which should make the most sense, other than another supply shock from China. We increased our position in Ford on Thursday. Still, all things considered, I’d like to make one more point: if a Caterpillar or a Deere (DE) fell to a lower level, it would make a lot of sense to buy. Another dilemma: space travel. A recession should dry up demand for aircraft, but replacement is critical. Club holding company Honeywell (HON), which makes cockpits and aircraft engines, is selling at 24 times earnings, while Raytheon Technologies (RTX) clocks in at 21 times earnings. The latter is most likely undervalued due to Russia’s war in Ukraine. Can these be justified? These are the highest multiples in the entire market, including Club Holdings Apple (APPL) and Alphabet (GOOGL). It could all come together in the middle. I’m seeing some contraction from the large caps. Semiconductors are a moving albeit decreasing target, with the exception of outlier Nvdia (NVDA) at 44 times earnings, which is now a small club position due to its fragility. All but the fastest growing companies could be trading at around 16-17 times earnings. That’s going to be our general assumption for next year — a mix of softs with higher multiples and cyclicals with lower ones. The moot stocks are in technology, which is poised to disappoint even if a so-called clearing event were to happen eventually. (For a full list of the shares in Jim Cramer’s Charitable Trust, see here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIAL OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Steel bundles from Nucor Corp. are for sale at Thompson Building Materials in Lomita, California, USA, on Thursday, August 30, 2012.
Patrick Fallon | Bloomberg | Getty Images
Price-earnings ratios point to recession. But the multiples said similar things in 2022. So how long can the multiples stay this low?