Favorable macro data on receding inflationary pressure and stable economic growth resulted in the Federal Reserve slowing down its rate hikes to 0.25 percentage points. The already-raised investor optimism was rekindled further by this move.
On the other hand, Federal Reserve Chairman Jerome Powell’s hawkish comments suggested rate hikes would continue until the committee is convinced that inflation is heading towards the 2% target.
Experts believe such persistent rate hikes could tip the economy into recession. On the bright side, some experts think since the economy performed better than anticipated, this could steer it away from the recession track.
However, some strategists like Mike Bell of JPMorgan believe that the stock markets could be in trouble without a recession. He believes that if the Fed fails to rein in interest rates like investors hope, it could have a more far-reaching impact.
Amid such uncertainties, fundamentally strong stocks UnitedHealth Group Incorporated (UNH), PepsiCo, Inc. (PEP), and The Kroger Co. (KR) might be solid buy options in 2023.
UnitedHealth Group Incorporated (UNH)
UNH is a diversified healthcare company. The company operates through four segments: Optum Health; OptumInsight; OptumRx; and UnitedHealthcare. It offers consumer-oriented health benefit plans and services, software and information products, health care coverage, and well-being services.
On January 23, 2023, Optum Rx, UNH’s pharmacy services company, launched Price Edge, a tool that seamlessly compares direct-to-consumer pricing for traditional generic drugs with insurance pricing to ensure members receive the lowest prescription drug price. This should benefit the company.
On January 5, Northern Light Health and Optum announced a strategic relationship to enhance the healthcare experience throughout Maine. Administrative efficiency is expected to increase, along with advanced innovative technology that could help serve patients more effectively.
On November 16, UNH and Life Time Group Holdings, Inc. (LTH) announced an expansion of their relationship to include access to all Life Time locations. This is expected to help UNH deliver additional value to its customers, thereby driving appreciation of brand equity and market expansion.
The stock’s trailing-12-month EBITDA margin of 9.82% is 151.2% higher than the industry average of 3.91%. Its trailing-12-month ROCE is 26.26% compared to the industry average of negative 40.08%.
On November 4, UNH announced its quarterly dividend of $1.65 per share, which was payable to shareholders on December 13. This reflects the company’s ability to pay back its shareholders.
For the fiscal fourth quarter that ended December 31, 2022, UNH’s total revenues increased 12.3% year-over-year to $82.79 billion. In addition, adjusted net earnings attributable to UNH common shareholders came in at $5.06 billion and $5.34 per share, up 18.1% and 19.2% year-over-year, respectively.
Analysts expect UNH’s revenue for the fiscal first quarter ending March 2023 to come in at $89.76 billion, indicating a 12% year-over-year growth. Street expects the company’s EPS for the same quarter to grow 10.7% year-over-year to $6.07. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
UNH has gained marginally intraday to close the last trading session at $475.24. It has gained 1.1% over the past five days.
UNH’s POWR Ratings reflect its fundamental strength. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
UNH has a B grade for Growth, Stability, Sentiment, and Quality. In the A-rated 11-stock Medical – Health Insurance industry, it is ranked #4.
Beyond what we’ve stated above, we have also given UNH grades for Value and Momentum. Get all UNH ratings here.
PepsiCo, Inc. (PEP)
PEP is a popular food and beverage company that operates through its seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia and New Zealand; and China Region.
On February 1, 2023, PEP increased its quarterly dividend by 7% from the previous-year value to $1.15 per share, payable to the shareholders on March 31, 2023. PEP has paid consecutive quarterly cash dividends since 1965, and 2022 marked the company's 50th consecutive annual dividend increase. This reflects its cash generation abilities.
On December 5, 2022, PEP announced a new packaging goal intended to double down the scale of reusable packing models from 10% to 20% by 2030. This ambition is driven by disruptive innovation that aligns with the company’s sustainable packaging vision.
The stock’s trailing-12-month gross profit margin of 53.24% is 68.8% higher than the industry average of 31.53%. PEP’s trailing-12-month EBIT margin of 15.05% is 99.6% higher than the industry average of 7.54%.
PEP’s net revenue came in at $21.97 billion for the third quarter that ended September 3, 2022, up 8.8% year-over-year. Its non-GAAP gross profit increased 8.4% year-over-year to $11.73 billion.
Also, its non-GAAP operating profit came in at $3.60 billion, up 10.9% year-over-year. Non-GAAP net income attributable to PEP per common share grew 10.1% year-over-year to $1.97.
For the fiscal first quarter ending March 2023, analysts expect PEP’s revenue to increase 3.7% year-over-year to $16.80 billion. Its EPS is estimated to grow 7.5% year-over-year to $1.39. PEP surpassed EPS and revenue estimates in all four trailing quarters, which is impressive.
Over the past five days, the stock has gained 1.8% to close the last trading session at $171.82. Moreover, it has gained 1.6% intraday.
It’s no surprise that PEP’s POWR Ratings reflect a promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
PEP has an A grade for Quality and a B for Growth, Stability, and Sentiment. In the A-rated Beverages industry, it is ranked #6 out of 37 stocks.
Click here for the additional POWR Ratings for Momentum and Value for PEP.
The Kroger Co. (KR)
KR operates combination food and drug stores, multi-department stores, marketplace stores, and price impact warehouses. It also manufactures and processes food products for sale in its supermarkets and online, and sells fuel.
On January 20, KR declared a quarterly dividend of 26 cents per share, payable to shareholders on March 1, 2023. This reflects on the company’s ability to pay back its shareholders.
On December 16, 2022, Kroger Health, the healthcare division of KR, and Prime Therapeutics LLC announced a direct agreement for the Kroger Family of Pharmacies to remain in-network. President of Kroger Health, Colleen Lindholz, said, “We look forward to working collaboratively to improve the health outcomes of our collective customers by increasing health access, delivering pricing transparency and ensuring affordable prices.”
The stock’s trailing-12-month ROCE of 24% is 130.8% higher than the industry average of 10.4%. Its trailing-12-month ROTC of 9.38% is 52.5% higher than the industry average of 6.16%.
For the fiscal third quarter (ended November 5, 2022), KR’s sales increased 7.3% year-over-year to $34.20 billion. Adjusted net earnings attributable to KR rose 9.2% from the prior-year quarter to $643 million. Adjusted net earnings attributable to KR per diluted common share came in at $0.88, up 12.8% from the prior-year quarter.
For the fiscal first quarter ending April 2023, analysts expect KR’s revenue to be $45.46 billion, indicating a 1.9% year-over-year growth. Street EPS estimate for the same quarter of $1.48 reflects a rise of 2.2% from the prior-year quarter. In addition, KR topped consensus EPS and revenue estimates in all four trailing quarters, which is impressive.
The stock has gained marginally over the past five days and intraday to close its last trading session at $44.54.
It is no surprise that KR has an overall A rating, which equates to a Strong Buy in our POWR Ratings system.
KR is also rated a B for Quality and Value. It is ranked #9 of 39 stocks in the A-rated Grocery/Big Box Retailers industry.
Click here to see additional POWR Ratings of KR for Growth, Momentum, Stability, and Sentiment.
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UNH shares were unchanged in premarket trading Tuesday. Year-to-date, UNH has declined -10.36%, versus a 7.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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