3 Top Stocks for Q4 2022

Dave Sekera: After starting the year in overvalued territory, following the 25% decline in the stock market, we now think the equity market is significantly undervalued.

However, as the market continues to contend with the headwinds we identified at the beginning of the year, we expect that volatility will remain elevated over the foreseeable future.

In order to establish a durable bottom, the markets are looking for a reacceleration of economic growth and evidence that inflation will moderate next year.

3 Top Stocks for Q4 2022

These 5-star stocks are considered undervalued. Data as of Oct. 14, 2022.

1. Simon Property Group SPG
2. Boston Beer SAM
3. ServiceNow NOW

In such a scenario, where market can quickly surge and plunge based on economic and inflationary metrics, I prefer to stick with stocks that are leveraged to broader trends and long-term secular growth themes.

For example, one of the trends we continue to expect over the next 12 to 18 months is the normalization of consumer behavior as pandemic recedes. During the pandemic, there was a huge shift in consumer spending into goods and away from services. We expect that as behavior normalizes, spending will revert back to prepandemic trends.

Two of the best picks from our analyst team that are leveraged to this trend include: Simon Property Group and Boston Beer.

Simon Property Group is a REIT that specializes in investing in Class A shopping malls. The stock is rated 5 stars, trades at 41% discount to our fair value, and pays over a 7% dividend yield.

REIT stocks have significantly underperformed the broad market this year due to the impact of rising interest rates, and stocks of mall operators have been especially hard-hit as investors are skeptical of retail real estate.

According to our analysis, we think Class A malls will benefit as foot traffic continues to recover. In addition, mall operators have been doing several things to keep themselves relevant in a world with ever-increasing online sales. For example, they have revised the portfolio of retailers in their malls to remain relevant to shoppers and have evolved to become more experiential. Malls are increasingly offering more services such as restaurant dining, physicians offices, and exercise facilities--those things that cannot be replicated online.

For investors looking for a stock in the defensive category, I will highlight Boston Beer. We assign Boston Beer with a narrow economic moat based on a combination of its intangible assets and low-cost advantage as compared to other craft brewers. The stock is rated 5 stars and trades at about half of our fair value.

During the pandemic, the volume of alcohol consumption really didn't decline, but it shifted to at-home consumption from on-premise consumption. And there, consumers traded down to lower-priced brands. As consumers return to public events, we expect consumption will shift back to on-premise. According to our analysis, consumers are more brand-conscious when they order alcohol in public and tend to choose higher-priced branded alcoholic beverages, which are higher margin.

For investors looking for an investment in the technology sector, one stock we think is overlooked by the market is ServiceNow.

We assign ServiceNow a wide economic moat based on high switching costs to its clients. The stock is rated 5 stars and trades at a 45% discount to our fair value.

For those of you not familiar with the company, ServiceNow provides service-desk software solutions for a multitude of corporate functions.

The company has generally performed in line with our expectations thus far this year. However, its revenue growth has been hampered by foreign-currency-exchange translation due to the rapid appreciation of the U.S. dollar this year.

ServiceNow's success has been rapid and notably organic, and we project the top line will grow by a compound annual growth rate of 24% over the next five years. The company generates free cash flow margins of over 30%, placing it near the top of the software space. Lastly, the company has a strong balance sheet and will be able to ride out any potential economic storms.

Watch "Where to Invest Your Money in Q4 2022" from Dave Sekera for more investment ideas.