4 Stocks to Buy For Q2 2023

Dave Sekera: Following the second and third largest bank failures in U.S. history and then the forced merger of one of the largest European banks, the question is, What should investors be doing now?

Well, in my mind, there are several different opportunities that the market is presenting us with today. First, the carnage that we’ve seen across the regional bank stocks has weighed upon the entire financial sector. As such, there are now a number of nonbank financial stocks have been caught in this downdraft that we think have fallen to relatively attractive levels. Second, over the near term, we expect to continue to see consumer behavior normalization as the pandemic fades. Third, we do see several long-term secular trends in place that will end up playing out over the course of the next decade. And lastly, for investors with a low risk appetite, the market selloff has brought several defensive stocks down to more attractive levels.

4 Stocks to Buy for Q2 2023

These 4- and 5-star stocks look fairly valued. Data as of March 27, 2023.

Discover Financial Services DFS

Uber UBER

Albemarle ALB

Kellogg K

Now, in the financials sector, stocks in sectors such as investment banking, asset management, credit card services have all sold off even though they have very different business models. One such stock is Discover Financial Services. Discover is rated 4 stars. The company is rated with a narrow economic moat, and the stock now trades at a 35% discount to our fair value estimate. Now, while Discover does utilize deposit funding, it also has several other traditional funding options. So, for example, Discover could increase its usage of credit card receivables to fund asset-backed securitizations in the debt markets. From a fundamental point of view, although we do expect the economy to soften later this year, we have already incorporated an increase in charge-offs in our assumptions and note that the firm is in strong financial positions with good reserves.

Now among the stocks that we think are levered to consumer behavior normalization is Uber. Uber is rated 5 stars. The firm is rated with a narrow economic moat, and the stock trades at about half of our fair value estimate. Consumers are returning to restaurants, concerts, and other public events, and in addition, we forecast business travel will pick up over the course of this year and next. These two trends lead us to expect that we will see a continued increase in both the number of rides and the number of rides per user.

One of the long-term trends we see playing out over the next decade is a transition to electric vehicles. According to our research, we expect that two thirds all new auto production will be electrified by 2030. Yet, we also forecast there will not be enough supply of lithium to be able to satisfy this demand, which will in turn keep lithium prices elevated. One such stock that should benefit from elevated prices is lithium producer Albemarle. Albemarle stock is rated 4 stars. The company has a narrow economic moat, and the stock trades at a 36% discount to our fair value estimate. The stock has sold off since the beginning of February, as lithium prices have retreated from their all-time highs. However, we forecast undersupply in lithium will keep prices well above the cost of production over the next decade.

And lastly, for investors looking for an investment more defensive in nature is Kellogg. Kellogg is rated 4 stars. The firm has a wide economic moat, and the stock trades at a 21% discount to our fair value estimate. Its current dividend yield is 3.6%. The stock has been under pressure as investors are cautious regarding its planned split up into its global snacks business, North American cereal brands, and plant-based alternative offerings. However, using a sum-of-the-parts valuation, we’ve held our fair value estimates steady at $82 per share.

Watch “How to Invest in 2023′s Uncertain Market?” for more from Dave Sekera, CFA.