Dow Jones Bear Market: The Smartest Investors Are Buying These Beaten Down Stocks

Smart investors are often willing to go against the crowd or even go where there isn't even a crowd at all. That's pretty much the thinking behind looking at stocks like GE HealthCare Technologies (GEHC -0.25%), United Parcel Service (UPS -0.20%), and Apple (AAPL -1.32%). Here's why all three are worth a close look by insightful investors. 

1. GE HealthCare Technologies, an undervalued spinoff from General Electric

The recent spinoff from General Electric (GE -1.04%) doesn't have broad-based analyst coverage yet, but that shouldn't stop savvy investors from looking. The company has already preannounced its fourth-quarter earnings (due for release on Jan. 30), and they look good. 

For example, management expects 5% to 7% organic growth in 2023 alongside profit margin expansion and 85% free-cash-flow (FCF) conversion from net income. Meanwhile, fourth-quarter organic revenue growth was a whopping 12%, with earnings above prior guidance. 

The imaging and ultrasound-focused company has plenty of potential to grow margins, and with FCF of around $2.1 billion in 2022, it's trading on 14.2 times its FCF. That's too cheap for a world-class company with a huge installed base of equipment at medical facilities. In addition, the healthcare equipment company also owns a high-margin complementary pharmaceutical diagnostics business. 

Throw in the fact that earnings and cash flow are being depressed by ongoing supply chain issues (which will hopefully recede through 2023), and the stock looks like an even better value. 

2. UPS continues its transformation strategy 

A slowing economy means weaker demand for package deliveries, and that's not good news for UPS. Its rival, FedEx (FDX 0.61%) is already restructuring in response to slowing demand. UPS will surely come under pressure too, and that's why Wall Street analysts have revenue and earnings declining in 2023.

Still, it's essential to keep some perspective here. The forward estimate for $12.23 in EPS for 2023 puts UPS on less than 15 times forward earnings. Moreover, just as with Apple, UPS is a business that benefited significantly from the pandemic. In other words, it's coming up against difficult comparisons. In addition, and again in common with Apple, UPS is improving the underlying profitability of its business. 

As previously discussed, the transformational strategy of focusing on selected end markets (such as small and medium-sized businesses and healthcare) while being more selective over deliveries (focusing on higher-margin deliveries) has resulted in a tangible improvement in underlying margin and free cash flow. 

Investors in UPS can expect that trend to continue in 2023, and the stock's 3.3% dividend yield provides a decent income while you wait for the economic cycle to turn again.

3. Apple's services growth means higher profit margins

Undoubtedly, the pandemic and the stay-at-home measures imposed on populations created a boom in demand for electronic devices. That's apparent in Apple's surging revenue and earnings before interest, taxation, depreciation, and amortization (EBITDA) through the back half of 2020 and 2021. Of course, that creates difficult comparisons, and Wall Street analysts have Apple's revenue growth moderating to low single digits and EBITDA flat in 2023.

As such, the stock has sold off by 22% over the last year. 

Data by YCharts.

But here's the thing. As you can see above, the current enterprise value (market cap plus net debt-to-EBITDA valuation is similar to what it was entering 2020 (when very few could have predicted the pandemic). Moreover, Apple is a different business now in that its higher-margin services business has grown substantially at a rate higher than its products (iPhone, Mac, iPad, Wearables, Home, and Accessories) business. 

In fact, in the last reported quarter, Apple's services business accounted for 21.2% of revenue (up from 17.8% in 2019) and almost a third of gross profit (compared to slightly less than 30% in 2019). Also, note that Apple's services gross profit margin has increased considerably.

Data source: Apple presentations.

All told, even though Apple's overall growth is likely to slow in 2023, the underlying growth in higher-margin services growth is improving the company's long-term margin and earnings potential. Meanwhile, the stock is moving into value range.