As we head into 2024, one of the major headwinds for stocks has been removed. Inflation has fallen more than the market expected, and the Fed is responding. After pausing their rate hikes since August, Chairman Powell has indicated the rate hiking cycle is over. Indeed, the latest Fed dot plots indicated that most members expect rate cuts in 2024.
Over the past month, the 10-year yield has been foreshadowing rate cuts dropping from 5% to under 4%. Risk assets have also rallied, and this momentum will likely persist in 2024.
Overall, excluding the Magnificent 7, stocks are fairly valued. Moreover, there are pockets of undervalued stocks that can do well in 2024. These 2023 top stocks are up over 50% YTD and have the fundamentals to support further gains in 2024.
Broadcom (AVGO)
This semiconductor stock has been one of the top stocks in 2023, benefiting from the AI wave. Year-to-date, Broadcom (NASDAQ:AVGO) has gained over 100%. Yet, despite the massive gains, the fundamental picture could improve further in 2024.
On December 7, the company reported an earnings beat driven by demand for its ethernet solutions and custom AI accelerators. Notably, the company is experiencing strong demand for these products from cloud service providers such as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The soaring demand led to FY2023 semiconductor solutions revenue increasing 9% year-over-year to $28.2 billion.
In 2024, the company sees more demand for its AI products. In FY2023, revenue from AI surpassed 15% of semiconductor revenue and management expects a higher contribution from AI. They predict that FY2024 generative AI revenue will represent more than 25% of semiconductor revenue.
Another catalyst is the just-closed $69 billion acquisition of VMware. Management believes the deal will be transformational over the long term. It will increase annual infrastructure software revenues to $20 billion. Also, management expects the acquisition to improve cash flows and accelerate revenue growth.
In terms of profitability, Broadcom is one of the most profitable companies. In FY2023, revenues were $35.8 billion, growing 8% year-over-year. Looking at profits, adjusted EBITDA was $23.2 billion, representing 65% of net revenue. Remarkably, only a few companies boast a 65% EBITDA margin, highlighting the quality of Broadcom’s business.
Considering the revenue tailwinds from AI accelerators, AVGO stock is a buy. It’s a cash-generating machine with an AI growth story. Lastly, with the VMware acquisition, the company will see software revenues accelerate.
United Rentals (URI)
Earlier in 2023, investors ditched United Rentals (NYSE:URI) due to the Silicon Valley Bank collapse and fears of a recession. However, as robust GDP data has trickled in throughout the year, the stock has rebounded sharply. As of this writing, URI is one of the top stocks for 2023, up over 50% YTD.
As North America’s largest equipment rental company, United Rental is highly leveraged to the U.S. economy. So far, the U.S. economy has shown solid GDP growth, hitting an impressive 5.2% growth in the third quarter. This strength bodes well for the construction industry, where United Rentals is a major player.
Another catalyst for one of 2023’s top stocks has been the reshoring trend. As companies relocate their supply chains to the U.S., there has been a record construction spending on manufacturing. According to the Conference Board, manufacturing construction spending rose 40% in 2022. Growth has continued in 2023, with September spending increasing by 62% YOY.
These trends spell solid demand for construction equipment over the next two years. Third quarter results highlighted the strength the company is seeing in all its end markets. Revenue increased 18% YOY, reaching a third-quarter record of $3.224 billion. Rental revenue increased 9.8% YOY and used equipment sales grew 102.2%.
URI stock is a buy, considering management sees a massive opportunity in large projects. They estimate $2 trillion of investments they can take advantage of. Furthermore, the company can grow through acquisitions to consolidate the fragmented equipment rental market.
General Electric (GE)
The post-pandemic travel demand has been a tailwind for the aviation industry. Airlines are boosting capacity and aircraft orders are increasing. General Electric (NYSE:GE) is one of the major manufacturers of jet engines and has seen demand soar with a record backlog.
Although the stock has had a stellar 2023, General Electric could have a much better 2024. The weaknesses in GE Vernova, the electrification and decarbonization business, have obscured the strength in the aviation business. However, the stock could soar once the GE Vernova spinoff happens in the second quarter of 2024.
The spinoff will leave General Electric with only GE Aerospace, which is focused on aviation and defense. Historically, GE Aerospace has always been the company’s crown jewel. Each jet engine sale comes with a lucrative maintenance contract. These after-sales services provide high-margin revenue stretching over several decades.
The spinoff of GE Vernova will be a catalyst for GE stock. Analysts expect the business will have higher margins and less macro exposure. Expect the stock to surge in 2024 as the markets appraise GE Aerospace at a higher multiple.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.