Boeing, Estée Lauder, and 5 Other Stocks for a Very Confusing Market

It’s been a wonky year for markets so far—but there may be several stocks to play it.

While the Federal Reserve has yet to give a clear signal it will pause interest rate hikes, many investors believe that rates will moderate in 2023 as the central bank works to fight inflation. As a result, stocks have rallied this year, with the S&P 500 up 9% andBig Tech companies generating stellar earnings results all in the face of bank worries and recession fears.

Several fund managers who attended the Morningstar Investment Conference are still looking for bargains—even though many economists such as Bank of America’s Michael Gapen see a case for a mild economic slowdown in 2023. The managers are focused on players in the aerospace industry, given the healthy outlook for travel, and companies with strong pricing power that can weather big swings in consumer demand.

Fidelity Investments portfolio manager Matt Fruhan during a panel on Wednesday said that he’s bullish on U.S. commercial aerospace firms such as Boeing (ticker: BA) and General Electric Company (GE). Passenger air traffic is growing and “we are still in the recovery phase of covid,” said Fruhan, who has been investing in the theme for the past 12 months to 18 months.

Demand for air travel in February—as measured by revenue and distances flown—rose 55.5% versus a year ago, according to the latest air traffic report from the International Air Transport Association, which represents some 300 airlines. That figure, however, is still lower than pre pandemic levels, matching about 85% of global traffic witnessed in February 2019.

Besides the U.S. names, Fruhan also likes French aerospace supplier Safran (SAF.France). It’s an engine manufacturer that also sells units like seats and lavatories and offers repair services, adding a recurring revenue stream.

Nate Velarde, co-portfolio manager of the Chautauqua International Growth Fund, bought Safran shares in 2022. He sees the proliferation of low-cost airlines as a tailwind—and is impressed by the company’s successive price increases in its spare parts business in 2021 and about 10% in November last year.

“Given the broad environment we are faced in, you need to find companies that have the ability to protect margins [through] pricing power,” Velarde told Barron’s at the conference.

Spencer Adair, a portfolio manager and partner at Baillie Gifford, says luxury cosmetic brand stocks are the best examples of pricing power, given makeup stands as “absolutely critical” in any macro environment.

One of his favourites: Estée Lauder (EL), which was a Barron’s pick last year. Shares are down 0.6% so far this year: Results for the December ended quarter showed prolonged Covid-19 lockdowns affected foot traffic at bricks-and-mortar stores in China. However, Adair expects these headwinds to abate, as China’s reopening gathers steam and Estée Lauder accelerates its direct to consumers sales.

Adair, who manages the nearly $300 billion investment firm, also likes Japanese skincare brand Shiseido (SSDOY), which reported a 6% drop in its China business last year. Adair cited demand from Chinese travellers, who are known for their interest in multi-step skincare regimens, as a tailwind.

Natasha Kuhlkin, a large-cap growth equity portfolio manager at Jennison Associates, sees strength in global luxury consumer brands. While sitting on a panel about the disruption of growth stocks with Adair and Fruhan, Kuhlkin named LVMH Moët Hennessey Louis Vuitton (LVMUY) and athleisure brand Lululemon Athletica (LULU). “There’s a controlled supply” of these companies, she said, adding that they “are starting to appeal to more consumers.”

Lululemon trades at 31.6 times forward earnings, lower than its 40.5 times five-year average. LVMH, meanwhile, is trading at 25.6 times nearly matching its average five-year price-to-earnings ratio.

Ultimately, it’s all about customer demand and how far can people stretch their frugality. Switching to a cheaper laundry detergent may work for some, but quitting on their go-to-gym leggings might be asking too much—giving companies with pricing power a leg up.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Boeing, Estée Lauder, and 5 Other Stocks for a Very Confusing Market

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021