Top 5 Stocks the Smart Money is Buying for the 2023 Recession

Well, as you guys saw from my last video, once again it is 13F season. So, in this video, we're going to be looking at the five most bought stocks by our 77 super investors in Q1 of 2023, as of course tracked by Dart Aroma.

Now, before we get started, right at the top of the video, I do just want to say that with videos like these, please remember that these five businesses are not stock recommendations. They don't create a shopping list for us as value investors. Remember, like I always say, this is just an ideas list for us to potentially explore further in our own time. But with that said, let's roll that list up on screen and let's have a bit of a look at which stocks are taking our super investors' fancy in Q1 of 2023.

And we start with the fifth most bought stock by our super investors in Q1; it was Intuit. Overall, we saw seven super investors buy in during the quarter. So, what do they do? Well, Intuit is a provider of financial management software to small and medium-sized businesses. But you'll probably recognize them more from the brands that they own: Turbo Tax, Credit Karma, QuickBooks, and MailChimp.

They divide themselves up into four key revenue segments, although the business is really carried by two of them, that being small business and self-employed, which is QuickBooks and MailChimp, and consumer, which is Turbo Tax. So, accounting software for small business and tax return help for consumers, combined, these segments make up about 80 percent of their revenue and the bulk of their segment operating income too.

So clearly, the super investors see something in this space, but honestly, I'm not sure I quite understand the thesis because to me, it seems like the business faces more macroeconomic headwinds than tailwinds over the next few years. Rising interest rates will obviously hurt most parts of business but particularly will hit their Credit Karma business. And if unemployment starts to rise, that will only hurt their Turbo Tax business.

Even the IRS itself is currently reporting a declining number of filed tax returns year over year after they saw that huge pandemic surge of 10 million extra filed returns, as the prior year tax returns were the determinant of the size of your stimulus check. So there are some headwinds the business definitely needs to overcome, but hey, maybe it's just ridiculously cheap.

Well, I should say that I don't know this business intimately, but on face value, it certainly doesn't look that way. The stock is down since the end of 2021 when they completed the MailChimp acquisition, but it does still sit around 415 dollars per share, which gives it a PE ratio of about 60. So, while it looked tasty for seven of our super investors, I personally can't say I'm convinced straight off the bat.

So please, if you guys have any more context on this business, definitely let me know down in the comment section below. But then, moving on to the fourth most bought stock by our super investors in Q1, we arrive at a bit of a controversial name, and that is Meta. Meta has obviously come under a lot of pressure across the past few years with their massive spending on metaverse development, but also from the reduction in profitability of their advertising.

Apple has reduced the effectiveness of ad targeting on their devices. The macroeconomic environment has caused many advertisers to pull back on their marketing budgets, and then on top of that, you also have the third big issue of short-form video being notoriously difficult to monetize. So just like that, all of a sudden, you've got quite a few tough headwinds for Meta, and these are headwinds that are still ongoing today.

It was this combination of factors that killed the stock about 70% between its high in 2021 and its low in 2022. But what's been crazy is the stock's come back in 2023! Since that low in November of 2022, Meta shares have gained approximately 180 percent. So, really impressive timing by our super investors on this one, and it seems at least in recent times, there does actually seem to be some positive news now coming out of the company that investors can cheer about.

In their most recent quarterly earnings, they posted their first year-over-year sales increase in four quarters. Revenue is up three percent year over year; however, to keep that in perspective, costs did rise quite substantially as well. So overall operating income is still 15% lower year over year, leading to their operating margin falling from 31% to 25% year over year.

But there are work limits of improvement, and they did issue optimistic guidance as well, with second quarter revenue expected to be between 29.5 and 32 billion dollars. Now, the interesting thing is if you just take that lower figure, that would still represent two percent revenue growth year over year. So investors are going from extreme pessimism where revenue isn't going anywhere to now a glimmer of optimism, as they could see two consecutive quarters of year-over-year revenue growth.

And as Peter Lynch says, you don't necessarily need to be in a stock when it goes from good to great; you can just find those turnarounds that go from crappy to semi-crappy, and usually, the institutional money will swing the stock back around. So, a very interesting time for Meta, but usually, this one is a feature in the most bought stocks by our super investors. So clearly, the smart money is very confident in this business for the long run.

So overall, that is Meta. And then coming in at number three, we have Microsoft. Microsoft was bought by nine of our super investors in Q1, and there's no doubt they've continued to ride the wave of AI over the past few months. In fact, since ChatGPT's release in November of 2022, Microsoft stock is now up about 40%.

Now, while it's true that OpenAI, you know, the people behind ChatGPT, are not owned by Microsoft, Microsoft is a significant shareholder in that business. Originally, Microsoft signed a one billion dollar deal with OpenAI back in 2019, becoming OpenAI's exclusive technology partner. Then earlier in this year, they extended that partnership with a further 10 billion investment, which prompted OpenAI co-founder Elon Musk to practically admit that OpenAI is effectively controlled by Microsoft at this point.

And while the success of ChatGPT hasn't meaningfully impacted Microsoft's financial results, the market is already jumping on board and pricing the future of AI into Microsoft stock. And interestingly, these developments have also prompted Bill Gates to get back into the stock, holding it for his foundation. It's now his biggest position in the portfolio.

And a little bit of extra anecdotal evidence: when I was talking to Monash, Per Bri, Mona should actually just sat down with a dinner with Bill Gates where Bill said he thinks Microsoft actually has an unstoppable lead in AI. So, a very interesting anecdote, but of course, nothing that we as value investors should necessarily be reading too much into.

What we should be more focused on, of course, is their core business because remember, at its heart, Microsoft has numerous software businesses that have gotten it to where it is today. And with these core pieces of software, usually, you can find some pretty powerful switching modes—from Windows to Office 365 to Azure, Xbox's Game Pass, LinkedIn, OneDrive, Microsoft Teams, and so on.

It's these pieces of software that lock customers into giving Microsoft cash quarter after quarter. And while AI is the hip new thing, I'm sure that for the super investors, it was likely the strength of their core business that made them want to buy in. Okay, and with that said, now we move on to the second most bought stock, which was Amazon.

So Amazon was bought by 13 of our super investors, and if I show you a picture of their stock chart, I think you'll understand why. Over the last six months or so, the stock has basically been reset to 2020 levels due to their business suffering at the hands of the macroeconomic environment. See, over the last few years, Amazon has really focused on expanding capacity to increase their revenue and their profitability, but of course, with this inflation we've seen right now, their costs are rising equally as quickly.

Their costs of goods sold are rising, operating expenses are rising, and ultimately, for Amazon, earnings are suffering. However, many value investors are betting that while they're going through some short-term pain at the moment, this period of investment will ultimately set them up for long-term gain, as this is a trend we've seen for decades.

With Amazon, money’s probably among others, is quick to use Amazon as an example of exceptional capital allocation. And you can see from this chart, thanks to my buddies Brad and David, that Amazon will not stop investing into growing their company. As you can see, while Alibaba, Google, Meta, and Apple are generating cash and they're just sticking it on the pile, Tencent and Amazon are the only two on the list that are taking their money plus some and putting it back into growth avenues within the business.

Now, businesses don’t just do this willy-nilly, so a table like this really shows you the companies that genuinely believe that they have something worth investing in. So that's the story with Amazon, and now finally we get to our most bought stock in Q1 of 2023, and it is Google. Now, Google usually features around the number one, two, or three spot in this list each quarter, and it's really not hard to see why.

Despite advertisers pulling back on marketing budgets over the past year or so, Google has been able to hold revenue fairly steady. And with their Cloud business still gathering momentum, plus the amazing cushion that is their balance sheet, I think the super investors are saying that this is just a money printing business that even during a recession doesn't even really go backwards.

They obviously have a very strong moat in internet search, and that actually protects them better than a company like Meta, as no device manufacturer can really mess around with them. You know, devices are reliant on Google, as opposed to a company like Meta that is reliant on devices. Pretty much everyone uses Google, and there isn’t even a close second, which puts Google in a very strong competitive position.

The moat is very powerful, and it protects their cash flows even in a tough macro environment. For example, over the past four quarters, their free cash flow has just consistently improved despite all that's been happening in terms of the economy. And then on top of that, you also have a company that has 115 billion in cash or short-term marketable securities and only 108 billion in total liabilities.

So, that plus their moat, plus their profitability, plus the fact that the business traded around ninety dollars per share in Q1 is most likely the combination of factors that had so many super investors buying the stock over the past few quarters. But, with that said, guys, they are the top five buys from the super investors in Q1 of 2023.

Let me know what you think, and let me know if any of these businesses actually feature in your portfolios. I would love to hear any further opinions on these stocks down in the comment section below. But guys, that will just about do us for this video. Please leave a like if you enjoyed, subscribe to the channel if you'd like to see more, but with that said, I'll see you guys in the next one.