The market may be getting a bit ahead of itself and is not fully accounting for the risks that loom heading into 2024, according to Manning & Napier portfolio manager Jay Welles. “The story is one of playing for capital preservation and defense in 2024,” he said. “It’s particularly warranted especially with the pile-on in excess positive sentiment in the last couple of months.” Stocks have been on a tear recently. The Dow Jones Industrial Average hit a record high this week, breaking above 37,000 for the first time. The S & P 500 is also less than 2% away from an all-time closing high. Those moves as traders cheered a Federal Reserve forecast that called for three rate cuts in 2024. But Welles thinks the market is stretched at this point, adding that investors haven’t priced in the possibility of a recession as expectations of a soft landing by the Fed increase. Against this backdrop, CNBC Pro asked Welles for five stocks he likes heading into the new year. Welles is a manager of the Manning & Napier Equity Series Class S fund (EXEYX), which is rated three stars by Morningstar. The fund, which has $64 million in assets and charges about 1% in fees, has returned more than 8% annualized over the past three years, putting it in the 26th percentile of funds in the U.S. equity category. 5 stocks to buy Welles said he looks for companies with attractive fundamentals and some sort of valuation dislocation. One stock that fit the bill is chemical company FMC . FMC has strong R & D capabilities and a highly differentiated portfolio with a “phenomenal pipeline of new products,” which includes a fast-growing area of biological and natural crop solutions, he said. Shares of FMC have plunged 52% this year, putting them on track for their worst year ever. FMC ALL mountain FMC headed for worst year ever Insurance company Progressive is another name Welles likes. “They’re competitively advantaged share gainers, so they have really strong brands in their respective markets and also have cost advantages because of their scale and well-built-out distribution channels,” Welles said. This makes them good buys for both the long run and near-term, where Welles expects margins to improve post-pandemic. Shares of Progressive are up nearly 18% in 2023. The stock has rallied 36% since hitting a July low. Two more names liked by Welles are Intercontinental Exchange and Masco . He said the Intercontinental’s recent acquisitions of Ellie Mae and Black Knight has increased its exposure to mortgages. Welles expects to see a pickup in mortgage origination volumes once mortgage rates begin to decline. Meanwhile, Masco will benefit from higher housing turnover due to falling mortgage rates, the fund manager said. Shares of Intercontinental Exchange have rallied 19% year to date. Masco has rallied 47% this year. The stock briefly fell close to its yearly low in October, but has since nearly recovered to an all-time high. Welles’ final stock pick was software engineering services Epam Systems , which already has a proven track record of growing at around a 20% organic rate. Welles believes that EPAM could sustain this growth rate for years to come as the company takes up market share in the extremely Epam shares have struggled this year, losing 11.4%. Strategies Welles breaks down his investing approach into three strategies. The first one is the strategic profile strategy, where the fund invests in companies with deep competitive moats for the long term. The second strategy is the hurdle rate strategy, which is better suited for industries that are more cyclical in nature, Welles said. In this method, Welles looks for industries that have an excess of supply over demand and as a result have seen prices and returns fall, rendering many producers unprofitable. The last strategy, called the bankable deal, is focused around buying $1 of asset value or discounted cash flow at around 50 to 60 cents. While the price discount can certainly count as a catalyst, Welles also tries to identify other reasons why that dollar of value could eventually be uncovered and realized.
