The price-earnings multiples speak of a recession. But the multiples were saying similar things in 2022. So how long can multiples stay this low? We’ve all read dozens of articles about what 2023 will bring us. I think most are sincere. Their only downside, as usual, is that they don’t touch stocks themselves. You could say that the S&P 500, which is currently trading at 18 times earnings, could fall to 16 times earnings even if earnings remain relatively stable. Or they could say that if the ending interest rate is 5% of the Federal Reserve’s Fed Funds Rate, we could get 14-hour earnings. But those analyzes don’t tell you how they arrived at that S&P target. So I want to attack the S&P target thesis by looking at a few stocks that are signaling the futility of forecasts. Let’s start with two stocks: Johnson & Johnson (JNJ) and Nucor (NUE). Pharma giant J&J, one of my favorites in the Club portfolio, is trading at 18 times forward 2023 earnings. And I think that reflects an impending recession as its gains shouldn’t be hurt by a slowdown. If a recession hits, the stock will trade higher, not lower, as a recession would likely signal the end of the Fed’s rate hikes. Now let’s take Nucor, the best steelmaker in the world. It’s forecast to earn $28 per share this year and then drop to $12 per share next year as a likely recession hits. I’m having a hard time at the 4x earnings it’s currently trading at, but it’s evident that the stock market is bracing for a serious recession that would see Nucor more than halve its earnings. But where does this income come from? The biggest earning sector will be infrastructure, which should rise rather than take a hit next year given new federal government spending. This infrastructure spending includes everything from bridges and tunnels to buildings, which Nucor dominates. Nucor also has significant exposure to oil and gas through its pipeline and heavy equipment businesses. At the same time, the industrial Caterpillar (CAT) is selling at an 18-hour profit due to demand. That mocks Nucor’s 4 hours. With these end markets and CAT’s dramatically higher multiple, something has to give way. Something is wrong. I think it’s Nucor’s 2023 earnings estimates — they’re too low. My point is that you have the most cyclical stocks trading like they’re falling apart, but the heavier traditional cyclical stocks are not just trading higher, they’re trading much higher. My conclusion is that JNJ is “right” with what it sells, Caterpillar and the like are most likely slightly wrong – too high but still in the mix – and Nucor and the like are just plain wrong. Then why don’t we buy Nucor? Because I think it can go lower. Meanwhile, the auto sector is big and the auto industry is expected to slump over the next year as demand slows. I think the market is seriously misreading this thesis. People have stopped buying because cars and trucks are unnaturally overpriced due to tight supply and higher interest rates. Ultimately, I think cars will remain strong in a recession. So the best compromise is Ford (F) which, barring another supply shock from China, should make the most sense. We increased our position in Ford on Thursday. But all in all I would like to say one more thing: if a Caterpillar or a Deere (DE) came down to lower levels it would make a lot of sense to buy. Another dilemma: Aerospace. A recession should dry up aircraft demand, but replacement is key. Clubholding Honeywell (HON), which makes cockpits and aircraft engines, is selling at 24-hour profits, while Raytheon Technologies (RTX) posts at 21-hour profits. The latter is most likely undervalued as a result of the Russian war in Ukraine. Are these acceptable? They are the highest multiples in the entire market, including club holdings Apple (APPL) and Alphabet (GOOGL). It could all meet in the middle. I see a shrinking of the big caps. Semiconductors are a moving, albeit declining, target, with the exception of outlier Nvdia (NVDA) in 44-hour gains, which is now a small club position due to its vulnerability. All but the fastest-growing companies could be trading at around 16 to 17 times earnings. That will be our broad assumption for next year – a mix of soft goods with higher multiples and cyclicals with lower multiples. Controversial stocks are in the technology space, which will disappoint even if a so-called clearing event eventually occurs. (See a full list of Jim Cramer’s Charitable Trust stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim spoke about a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. 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Steel bundles from Nucor Corp. sit for sale at Thompson Building Materials in Lomita, California, on Thursday 8/30/2012.
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The price-earnings multiples speak of a recession. But the multiples were saying similar things in 2022. So how long can multiples stay this low?