By: Phil Kernen
The story of 2022 has been one of higher interest rates and lower stock prices. Indeed, most stock prices are down, but not every company has suffered. Some share prices have increased in 2022. As of September 30, 2022, 77 stocks in the S&P 500 were flat or positive for the year. Who are they, and why are they running against the grain?
Twenty-five of those names, and sixteen out of the top twenty, are in the energy sector. One company, a U.S.-based solar panel supplier, has managed its supply chain well and reported growing sales and earnings. The rest of the companies drill for, produce, transport, and refine oil and natural gas. When the pandemic arose in 2020, energy demand declined so dramatically that oil prices briefly turned negative. As economies reopened, energy demand returned to a degree that overwhelmed worldwide productive capacity, driving oil prices as high as $120/barrel in March and June before falling back under $90 more recently. The Russian invasion of Ukraine, reduced production in the U.S., and OPEC openly pursuing a goal of $100 oil leaves carbon energy production highly profitable and supportive of growing stock prices.
Fifteen of those names are in the healthcare sector. At the beginning of the year, many investors moved to specific healthcare subsectors as defensive plays. Some of those names have thrived since, including three intermediaries that distribute medicines for drugmakers to pharmacies. They benefitted from their involvement in an opioid litigation settlement in February, as well as growing clarity around opioid settlements involving other litigants. One intermediary recently agreed to appoint four director nominees from an activist investor, leading other investors to bid up the stock in hopes of greater gains. And several pharmaceutical companies have experienced positive trial results for new therapy treatments they hope to bring to market, including treatments for Alzheimer’s disease, weight loss treatments, and hypertension drugs.
Eight companies sell consumer staples or products which are almost always in demand. One is a beer producer with few identifiable advantages compared to competitors. The rest are food-related companies enjoying greater success in raising selling prices to more than cover higher input costs. Though everybody needs to eat, not every food-related company is thriving. The successful firms in 2022 spent the last few years struggling as they responded to competitive pressures and changing food tastes by readjusting their lineups, shedding poorly performing products in favor of areas reflective of growing consumer interest.
Seven companies are in the financial sector. One regional bank bought a competitor, and investors are optimistic about cost-cutting benefits. However, they are subject to the same effect of interest rates as the other banks. The rest are insurance companies that offer products needed during good times and bad. Further, most insurance companies weight their investment portfolios more heavily towards bonds than stocks. Rising interest rates allow them to invest new premium dollars at higher yields, helping support earnings.
With housing activity in deep decline and commercial office properties less than half full, only one real estate company is positive in 2022. However, under new plans to diversify, they may dilute their narrow focus on casinos, hospitality, and entertainment properties. Four companies in the materials sector have positive returns. Three offer fertilizers and crop protection from weeds, diseases, and insects. With food costs rising, strategies to help manage the costs of production and find ways to increase yields are valued higher by investors. The fourth offers chemicals for industrial applications. The only technology-related name on the list provides community and regional banks with the technical support needed to compete with large banks.
Utility stocks typically decline when interest rates rise. Yet, four utilities are positive for the year due primarily to company-specific factors, including bankruptcy, construction cost overruns, and regulatory setbacks. All are on the backside of their issues, allowing for greater clarity around future earnings prospects. The company with the smallest positive gain is Twitter. If not for the ongoing purchase bid from Elon Musk and associated litigation, Twitter’s slightly positive returns would likely be deeply negative alongside other social media platforms. However, investors are acting as if the purchase is still expected to go through and keeping the share price elevated.
Even under tightening financial conditions, a down market offers opportunities and some companies will find ways to grow earnings. Far from being a sign of taking advantage during bad times, they are responding to changing needs, the key to which leads to profitable companies and growing portfolios.
Disclosure: This is for informational purposes only and any reference to a specific industry does not constitute a recommendation to buy or sell a company in that industry. The reader should not assume that an investment in the securities in the industries identified or described, was or will, be profitable. For a complete list of disclosures, please click https://mitchcap.com/disclosure/