17 Undervalued S&P 500 Stocks to Weather an Earnings Recession in 2023

There have been increasing chatters of an earnings recession in 2023, something that hasn’t occurred since COVID-19 blasted corporate results to the ground in 2020.

To be clear, the definition of an earnings recession is a back-to-back decline in earnings. While 4Q22 results are still underway (82% of S&P 500 has reported results), the street is forecasting earnings to have fallen -4.7% from the year-ago period, according to data from Factset.

Source: Factset

If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported a YoY decrease in earnings since 3Q20. Negative EPS growth has happened only 4x over the past 23 years, with each year being followed by a “significant” price downside in the market.

Looking ahead, the street expects an earnings decline of -5.4% YoY in 1Q23 and -3.4% YoY in 2Q23. That will fit the definition of an earnings recession.

However, weak earnings seen in 1H23 are expected to swiftly reverse in 2H23, where the street’s current consensus is for earnings to grow by 3.3% and 9.7% in 3Q23 and 4Q23, respectively.

Amid the current tough earnings environment faced by US corporates, has the market already priced that in?

Historically, the majority of price downside in equities comes after forward EPS growth goes negative. In other words, the current earnings recession is not priced in yet.

The other reasons are:

Increase in consumer debt + decline in savings

Unemployment starting to increase as seen from widespread retrenchment in tech firms

The persistent inverted yield curve

While it pays to be cautious of the imminent earnings recession that is about to hit us, that should not imply an inaction on the part of investors, or to go all into cash.

In this article, I will highlight 17 blue-chip S&P 500 stocks that are potentially undervalued and are prime to “avoid” an earnings recession.

These companies are screened based on their ability to continue growing their earnings amid the current earnings recession in 2023. In addition, they are trading at less than 50% of their historical 5-years Price-Earnings Multiple ranges, which could indicate a level of undervaluation.

The screening criteria are as such:

Historical 1-year EPS growth > 0%

Current quarter EPS growth > 10%

Next quarter EPS growth > 10%

Current year EPS growth > 10%

Next year EPS growth > 10%

5-Year P/E Range < 50%

We are screening for stocks that are forecasted to grow their EPS in both the current and next quarter (1H23) by a magnitude of 10% YoY, a period where many companies are expected to see weak earnings performance.

In addition, we want to make sure that these blue-chip companies are also forecasted to grow their earnings this year and into the next, by a magnitude of 10% as well.

Lastly, they have to be trading at < 50% of their historical P/E multiples.

There are a total of 17 companies in the S&P 500 that meet these rather stringent criteria. These are potentially undervalued stocks that can weather an earnings recession in 2023.

The table below shows the 17 blue chip stocks that meet the stringent screening criteria I set in place. 

Do note that these companies are also trading 50% below their 5-year historical P/E range.

An investor should be monitoring these stocks for any potential price weakness as a result of the “earnings recession” driven market sell-off and dare to capitalize when “blood is everywhere on the street”.

The largest market cap counter in the list is ServiceNow – NOW ($89bn) while the smallest market cap counter is Juniper Networks – JNPR ($10.2bn).  

There are currently 2 stocks in this list that I am also holding in my Stock Alpha Blueprint Portfolio. This portfolio seeks to find stocks that are of a blue-chip status and often market leaders in their respective industries.

More importantly, stocks in the Alpha Blueprint Portfolio fulfill what I termed as my Power of 5 metrics, metrics that top investors used all the time to find outperforming stocks.

These metrics are based on the following financial characteristics:

Sales + earnings growth

Operating leverage

Cash Flow

Credit risk

Efficiency

Last but not least, we seek to capitalize on these stocks when they are trading at the right valuation.