Articles, Investing

10 Quality Stocks With Significant Upside Potential

Written By: Rick Orford
Reviewed by: Mike Reyes
Last Updated March 27, 2023

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The S&P 500 closed in a positive week at 1.39%, recovering from the earlier week’s sell-off. With the U.S. Fed calming investor worries on the banking sector’s potential liquidity crisis, most sector indices bounced back, with Consumer Services being the leader closing at 3.40%, followed by Energy at 2.29%. The top-performing sector for the year is still Consumer Services, while Energy is still the weakest among the sectors.

US Stock Market Returns for the Week: March 20-24, 2023
IndexLastYTD1 Week
S&P 5003948.723.421.39
S&P 500 Energy596.32-11.052.29
S&P 500 Materials480.17-1.122.12
S&P 500 Industrials817.61-1.310.67
S&P 500 Consumer Discretionary1106.399.650.44
S&P 500 Consumer Staples749.13-2.281.43
S&P 500 Health Care1465.45-6.361.49
S&P 500 Financials516.28-9.440.58
S&P 500 Information Tech2545.7617.492.04
S&P 500 Consumer Services188.2718.453.40
S&P 500 Utilities323.73-6.88-1.20
S&P 500 Real Estate217.66-3.92-1.38
S&P Dividend Aristocrats722.86-2.360.95
Dow Jones Industrial Average32237.53-1.361.18

Market Moving News

Central Banks Continue to Raise Rates Amidst Banking Turmoil – Switzerland, Norway, and Britain raised rates after the Fed raised rates by 25 basis points last Wednesday.

The chart below shows the change in interest rates since Sept. 2021 tightening cycle for the 10 most traded currencies.

Big Office loans, the looming risk for small US banks – According to a Reuters analysis, banks with assets between 1-10 billion US that have at least 33% CRE (commercial real estate) loans as part of their total books according to estimates by one of the top rating agencies, Fitch. This exposes them to headwinds caused by the pandemic, where employees have been forced to work from home and rising interest rates increasing costs for refinancing.

Germany’s Largest Bank tumbles due to fears of containment of current banking sector turmoil – The bank was put into the spotlight after dropping 8.5% and a sharp jump in the cost of insuring its bonds at the risk of default. Investors fear that Deutsche bank might end up as the next Credit Suisse but are assured by banking analysts that the German bank has healthy fundamentals and strong profitability.

Week Ahead 

Senate Banking Committee is to hold the first hearing on SVB and Signature Bank collapse – US Senate Banking Committee is scheduled to have its first hearing from witnesses, including FDIC Chair Martin Gruenberg, Fed Reserve official Michael Barr and Nellie Liang, undersecretary at the U.S. Treasury Department on March 28, 2023.

More economic data releases – Several US economic data are set to be released this the week including Consumer Confidence on March 28, GDP Final, and Initial Jobless Claim on March 30 and Core PCE and PCE index on March 31.

10 Quality Investing Stocks based on Warren Buffet Investing Principles

“Quality investing” is an investment strategy focusing on investing in high-quality companies with strong fundamentals. The strategy focuses on finding companies with a competitive advantage over their peers, sound and sustainable business models, and the ability to generate consistent cash flows. Our list focuses on the different facets of investing principles of Warren Buffet mentioned in Robert Hagstrom’s Book “The Essential Buffett: Timeless Principles for the New Economy.”

The companies are filtered based on the screened below (Sorted by Price to Free Cash Flow in ascending order):

·       Market Cap – greater than 500 million

·       Current Operating profit – Greater than 0

·       Historical 5-year annual Operating Profit – Greater than 0

·       Operating Margin % – Greater than Median Operating Margin%

·       Net Margin % – Greater than Median Net Margin

·       Top 30% Price to Free Cash Flow

·       Latest ROE-Greater than 15

·       ROE TTM – greater than 15

·       ROE 2Y ago – greater than 15

The companies in focus have consistently reported a positive Operating Profit (Operating profit is the amount of revenue left over after deducting operating expenses) for the last 5 years and the latest fiscal period. In addition, we are only looking at companies that have to operate (Profit per dollar of sales after the cost of production), and net (how much net income or profit is generated as a percentage of revenue) margins greater than the median for the said measure. Lastly, we choose companies that have a Return on Equity (shows if a company is using their funds effectively) greater than 15 this year, TTM, and 2 years ago, within the top 30% based on the lowest Price to Free Cash Flow (ensures that companies we get can continue to operate.

Amgen Inc.(AMGN)

Analyst Rating: Moderate Buy

Upside Potential: Up to 36.54%

Should you buy it?

Amgen prices jumped 2.11% last Friday, hoping to continue its bounce near the support at the $223.58 area. The divergence since February has provided signs of a potential bottom in confluence to its near-term low. Investors can wait for additional signs of a reversal to step in and buy into Amgen.

Thermo Fisher Scientific Inc. (TMO)

Analyst Rating: Moderate Buy

Upside Potential: Up to 17.69%

Should you buy it?

TMO prices are currently trading at the lower end of a rising channel. Fourteen days have breached above the 50 point mark, indicating a potential continuation in direction. Investors should wait for proper signals and employ risk management to get a better risk-reward ratio for TMO.

Broadcom Ltd. (AVGO)

Analyst Rating: Strong Buy

Upside Potential: Up to 21.82%

Should you buy it?

AVGO prices are trading around their resistance area near $645.00 and within a rising channel. SMA is showing it’s in a bullish trend with no signs of exhaustion. Investors can wait for a breakout and confirmation of a potential break-out play.

Teradyne Inc. (TER)

Analyst Rating: Moderate Buy

Upside Potential: Up to 21.82%

Should you buy it?

TER prices are trading above its bullish SMA and within the middle of its rising channel. Investors can wait for buy signals or a bounce on the 50-day SMA (red line) for an entry. Investors should also take note of RSI levels and signs of exhaustion, as the previous high has been in the overbought area.

Nordson Corp (NDSN)

Analyst Rating: Moderate Buy

Upside Potential: Up to 28.6%

Should you buy it?

NDSN prices are currently trading near the support area of around $204.00. Investors should wait for potential signals as RSI registered an oversold and can persist or provide a divergence signal for a possible bottom. 

Regeneron Pharmaceuticals (RGEN)

Analyst Rating: Moderate Buy

Upside Potential: Up to 28.6%

Should you buy it?

REGN broke out and is currently trading above the $800.00 resistance. Investors should wait for confirmation of the breakout to ensure a low-risk entry as breakouts can lead to fake outs as well.

Abbvie Inc. (ABBV)

Analyst Rating: Moderate Buy

Upside Potential: Up to 26.57%

Should you buy it?

ABBV recently closed above its medium 3 SMA’s (50,100,200 Moving average). RSI shows that it currently is in bullish territory, and we may see some potential continuation. Investors should wait for entry signals to help ensure a low-risk entry. 

Alphabet (GOOGL)

Analyst Rating: Strong Buy

Upside Potential: Up to 56.49%

Should you buy it?

GOOGL recently broke above its long-term 200-day moving average and is hovering near the oversold area to retest the previous resistance near $107.67. Investors should see how prices react within the current tight range to avoid any fake out/whipsaw based on the current price structure. 

Nasdaq Inc. (NDAQ)

Analyst Rating: Moderate Buy

Upside Potential: Up to 54.51%

Should you buy it?

NDAQ prices are currently trading near their short-term bottom, near $51.36. Prices have touched the oversold area recently and show some potential continuation to the downtrend based on price action. Investors should wait for signs of exhaustion on the downward pressure before entering to ensure a lower-risk trade.

Service Corp International (SCI)

Analyst Rating: Strong Buy

Upside Potential: Up to 28.01%

Should you buy it?

SCI prices tested its support around the $ 63.75 area and are currently trying to move near its long-term SMA (blue 200-day MA).  Prices recently showed oversold signals but no divergence or a break above the 50 mark yet. Investors should wait for additional signs before making a trade to ensure a lower-risk entry.

Final Thoughts

Markets may have recovered a bit from the turmoil in the banking sector, but investors should remember that we are not out of the woods yet. The high inflationary environment and higher interest rate risk are still in the current landscape. Investors should always be defensive and be prepared for opportunities that arise from sell-offs that occur.

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