The price-to-earnings multiple is called recession. But the multipliers have said similar things in 2022 as well. So how long can the multiples stay so low? We all have read dozens of articles about what 2023 will bring us. I think most are honest. Their only drawback, as always, is that they don’t touch the stocks themselves. They could say that the S&P 500, which currently trades at 18-times earnings, could trade at 16-times earnings, even if earnings remained relatively stable. Or, they can say that if the terminal rate on the Federal Reserve’s fed funds rate is 5%, we can get 14x yield. But these analyzes don’t tell you how they reached that S&P target. So, I’d like to attack the S&P target thesis by looking at a few stocks that signal the futility of the estimates. Let’s start with two stocks: Johnson & Johnson (JNJ) and Nucor (NUE). Pharmaceuticals giant J&J, one of my favorites in the Club portfolio, trades at 18 times forward earnings for 2023. If we were to face a recession, stocks would trade higher, not lower, because a recession would likely signal the end of the Fed’s interest rate hikes. Now take Nucor, the world’s best steel maker. It’s projected to earn $28 per share this year and then fall to $12 per share next year as a potential recession takes hold. I’m having a hard time with the 4 times earnings it currently trades at, but it’s clear the stock market is setting up for a serious downturn that will cause Nucor’s earnings to more than halve. But where does that income come from? The biggest gainer sector will be infrastructure, which, instead of taking a hit, should be higher given new federal government spending in the next year. That infrastructure spending includes everything from bridges and tunnels to buildings, which Nucor dominates. Then Nucor also has heavy oil and gas exposure through its pipeline and heavy-equipment businesses. Whereas, Industrial Caterpillar (CAT) trades at 18 times trailing earnings due to strong demand. He mocks Nukor 4 times. With those end-markets and CAT’s dramatically high multiples, something has to give. Something is wrong. I think it’s Nucor’s earnings estimates for 2023 — they’re too low. My point is that you have most cyclical stocks trading like they are diverging, but heavy equipment traditional cyclical trading is not only higher, but much higher. My conclusion is that JNJ is “right” in what it sells, Caterpillar and the like are most likely a little wrong – very much so, but still in the mix – and Nucor and the like are outright wrong. So why aren’t we buying Nucor? Because I think it can go down further. Meanwhile, the automobile sector has grown, and autos are thought to be something that will decline next year due to lower demand. I think the market is making a serious misconception on that thesis. People have stopped buying because cars and trucks are unnaturally high due to lack of supply and high interest rates. Ultimately, I think autos are going to be strong in a recession. So, the best compromise is Ford (F), which makes the most sense, barring another supply shock from China. On Thursday, we increased our position in Ford. Still, all things considered, let me make one more point: If a Caterpillar or a Deere (DE) were to bottom out, it would be a great one to buy. Another controversy: aerospace. A recession should kill demand for airplanes, but replacement is key. Club Holding Honeywell (HON), which makes cockpits and airplane engines, sells for 24 times earnings, while Raytheon Technologies (RTX) trades for 21 times earnings. The latter most likely resulted from Russia’s war in Ukraine. Are they justified? They are the top multiples across the market, including Club Holdings Apple (APPL) and Alphabet (GOOGL). It can all be found in the middle. I see some contraction in large caps. The semiconductor remains a go-to despite the low target, with the exception of outsider Nvidia (NVDA) at 44 times earnings, which now has a little club status because of its vulnerability. The fastest growing companies can trade at around 16-17 times earnings. That’s going to be our broad assumption for next year — a mix of soft commodities with higher multiples and cyclicals with lower ones. There are debatable stocks in tech that are poised to disappoint even when a so-called clearing event comes to an end. (See here for a complete list of stocks in Jim Cramer’s charitable trust.) 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 to send a trade alert before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. 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Nucor Corp. K steel bundles sit for sale at Thompson Building Materials on Thursday, August 30, 2012 in Lomita, California, US.
Patrick Fallon | Bloomberg | Getty Images
The price-to-earnings multiple is called recession. but multiplier Similar things were said in 2022 also. So how long can the multiple stay that low?