Best stocks to watch in 2023

What are the best shares to buy in 2023? With a recession looming, it makes sense to hold some defensive stocks, such as those in the tobacco, defence and pharmaceutical sectors. However, interest rates are expected to begin to fall eventually next year, while inflation – currently at 40-year highs – is anticipated to ease. As such, in our stock selection of the best stocks to invest in in 2023, we have put together a mixture of defensive and recovery opportunities. So what are the best stocks to watch in 2023?

1. M&G
2. Babcock
3. GlaxoSmithKline
4. Imperial Brands
5. Easyjet
6. Tesla
7. Microsoft
8. Taylor Wimpey
9. PayPal
10. Tesco

M&G

Shares in pensions and investments provider M&G were hit by Kwasi Kwarteng’s mini budget due to the devaluation of the pound and interest rate hikes and subsequent liquidity fears, falling 17%. The shares have since recovered some ground but are still down 5% for the year at 187.7p.

However, with a growing ageing population, the company is well-placed for the future. M&G posted strong half-year results in August, with operating cash generation up 40% to £433 million, while its shareholder Solvency II ratio was a solid 214% (198% last year).

The asset manager aims to deliver operating capital of £2.5 billion to the end of 2024, while it has also launched a share buyback scheme worth £500 million.

Meanwhile, the shares currently offer attractions to income seekers, with a dividend yield of 9.9%. Analysts at brokers Deutsche Bank Aktiengesellschaft recently cut their price target on the shares to 195p from 200p. However, this still leaves reasonable upside potential.

Babcock

Unfortunately, the war in the Ukraine continues, as do tensions between the US and China over Taiwan. Increased defence spending by Western nations means Babcock could be an attractive investment. The international defence contractor, one of our best stocks to buy now in the UK, recently returned to profit. It boasts a £9.9 billion order backlog, with 90% of revenues for 2023 under contract, including major deals with the Royal Navy and the Ministry of Defence.

The company’s management believes it could also benefit from increased demand for military training following the Ukraine conflict. The shares have not enjoyed the same strong performance this year as other defence companies, such as BAE Systems – which is up by 30% - and are down 5% this year to 281.8p. Nevertheless, while analysts at JP Morgan Chase recently lowered their price target on the stock from 510p, they still think the shares could hit 475p.

GlaxoSmithKline

The pharmaceuticals sector traditionally represents a safe port in a storm because consumers always need medicines regardless of the economic climate.

GlaxoSmithKline has not enjoyed the strong performance of its peer AstraZeneca this year, shares in which are up 37% over 2022, but still offers attractions. GSK’s shares are down 6% overall this year to 1510.6p. However, they recently received a boost after a US court dismissed 2,500 lawsuits against the pharma giant, which claimed its heartburn drug Zantac caused cancer. Analysts at broker Morgan Stanley had estimated that compensation claims could have hit $45 billion. This ruling should remove a major question mark over the shares.

Meanwhile, GSK also spun off its healthcare arm Haleon in July, while Momelotinib, the company’s treatment of myelofibrosis was recently submitted to US regulators. Third-quarter turnover rose by 9% after currency fluctuations to £7.8 billion, boosted by sales of speciality medicines. The pharma giant increased its earnings guidance for the full-year to a hike in sales of between 8% and 10% at constant exchange rates, and growth in adjusted operating profit of between 15% and 17%. Analysts at JP Morgan Chase recently set a price target on the shares of 1600p.

Imperial Brands

Tobacco stocks are not for everyone – especially investors with ESG concerns - but income seekers will appreciate Imperial’s generous dividend yield of 6.7%. Imperial Brands throws off plenty of cash and, as such, the company recently launched a £1 billion share buyback scheme.

Imperial is also seeing good growth in vaping products, especially in continental Europe, while it is also growing market share in combustible (traditional tobacco) products.

Admittedly, shares in the company are already up 34% this year to 2,111p, thanks to investors’ flight to defensive stocks and decreased appetite for risk. However, considering Imperial’s £1 billion share buyback scheme and growth potential in vaping, the shares are still worth following. Analysts at Royal Bank of Canada think they could reach 2350p, while those at Barclays have a price target of 2500p.

EasyJet

Shares in the low cost airline are down 30% this year to 388p after capacity issues in the airline industry delayed the company’s recovery from Covid-19 related disruption. Subsequent summer travel delays weighed on the carrier’s share price this year.

However, Easyjet recently posted significantly reduced losses and its best summer revenue performance yet. The airline posted its highest-ever earnings for a single quarter, achieving EBITDAR (earnings before interest, tax, depreciation, amortisation and restructuring) of £674 million, while Easyjet Holidays neared closer to its target of £100 million in revenues and the load factor improved to 92%.

While the company says it expects fuel costs to increase by 50% in the first-half of 2023, Easyjet is hedged for 74% of this at an average price of $814 per metric tonne – well below the current market price of $1,000 a tonne.

Chief executive Johan Lundgren thinks the company “does well in tough times” and that with the cost of living crisis, customers will beat a path to Easyjet, as they continue to enjoy a holiday on a budget. Analysts at Sanford C Bernstein forecast the shares could reach 700p. With Covid travel concerns receding, the company could benefit.

Tesla

Shares in the electric car manufacturer run by Elon Musk are down 46% this year to $182.45. This is due to a combination of the investor flight from technology stocks and fears that Musk has been distracted by his long and drawn-out takeover of Twitter.

However, while Tesla shares remain highly rated on a price earnings ratio of around 50, they could be a recovery play. More and more Teslas are being seen on the streets of Europe. This is because the company now has a gigafactory in Berlin, capable of producing 1,000 cars a week.

Indeed, in the third-quarter the company produced 365,000 vehicles and shipped over 343,000. Total revenues rose 56% to $21.5 billion (from $13.8 billion in 2021), while net income more than doubled to $3.3 billion and in the quarter free cash flow increased by 148% to $3.3 billion. Tesla is producing so many vehicles now that it is struggling to transport them, given logistics issues. Analysts at broker Morgan Stanley have a price target of $330 on the shares.

Microsoft

Microsoft shares have dipped by 25% this year to $275 in the general tech shares rout and current levels look like a buying opportunity. The company says it in difficult economic times it is helping customers “do more with less” and claims that digital technology is the “ultimate tailwind”. Certainly, some fund managers believe that the more established technology companies offer defensive qualities and, as such, the tech giant continues to put in a solid performance. First-quarter revenues rose 11% to $50 billion, while revenues from Microsoft Cloud grew 24% to $25 billion. However, net income fell by 14% as Windows OEM revenues decreased by 15%.

The company recently agreed to buy gaming group Activision Blizzard and the deal is facing regulatory scrutiny over competition issues in certain territories, including the UK. Microsoft also returned $9.7 billion to investors over the year. Analysts at broker UBS think the shares could reach $300.

Taylor Wimpey

Shares in the house builder are down 37% this year to 104p due to fears the UK housing market will slump next year. Rising interest rates and a likely recession next year have led the housing market to slow over the autumn. Estate agent Savills said it expects house prices to dip between 5% and 10% in 2023. However, in its recent trading statement Taylor Wimpey maintained its earnings guidance for the full-year, suggesting that it may show resilience.

While it is seeing higher mortgage rates hitting demand, the company says it continues to see good levels of interest from customers. As of November, Taylor Wimpey’s order book stood at around £2.6 billion (£2.8 billion in 2021).

However, over the long term the housing market will recover. Interest rates are expected to fall and demand for property continues to outstrip supply, although this may change if there are large scale mortgage defaults. As such, Taylor Wimpey is a long-term buy.

Tesco

Things aren’t easy in the retailing space right now. The cost of living crisis, coupled with rampant cost input inflation and rising wages are hitting companies squarely in the wallet. Consumers are counting the pennies as their energy bills spiral. However, grocery chain Tesco looks well-placed to weather the coming storm. True, the retailer has warned investors that profits will be lower this year – coming in at the bottom end of expectations.

It now expects retail adjusted operating profits of between £2.4 billion and £2.5 billion for the full-year. Nevertheless, cash flow is still forecast to be at least £1.8 billion, while Tesco has cut costs by £500 million and has initiated a share buyback scheme of £450 million.

Shares in the company are down 18% this year to 230p. However, this could be a long-term buying opportunity, given Tesco’s popular club card scheme and discount ranges.

PayPal

Shares in PayPal are down 60% this year to $72.23 as the flight from tech stocks continues. Earlier this year, activist investor Elliott Management took a $2 billion stake in the company, which specialises in online payment technology, and persuaded it to return up to $15 billion to investors. Recent third-quarter results were solid, with net revenues up 11% to $6.9 billion, while free cash flow rose by 37% to $1.8 billion.

Meanwhile, total payment volume increased by 9% to $337 billion. PayPal also raised its earnings guidance for the full-year. While the shares were hit by negative sentiment around weaker revenue guidance, it has raised its profits guidance to GAAP EPS of around $2.11 to $2.13. An investor day, which is due to be held early next year, could provide news flow for the shares.

Analysts at broker Goldman Sachs lowered their price target on the shares following the third-quarter results from $127 to $110. However, this still implies potential upside of over 40%. While the cost of living crisis may hit earnings in the short-term, PayPal dominates the online payment market and this looks like a decent entry point for investors.

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