Top 2 stocks to buy and 2 to avoid: research company

Mill Street Research, an independent consulting and research company, released its weekly newsletter on Monday. The report includes buy ideas and sell ideas for the Russell 1000. In this article, we will discuss a few key names in each category.

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Buy Everest Re Group stock

According to Mill Street’s quantitative analysis, Everest Re Group Ltd (NYSE: RE) is the firm’s top stocks both existing and new investors can buy now.

Everest Re is a global reinsurance and insurance company. The insurance sector may not be the most exciting to discuss, but it has performed well for investors. Everest Re Group stock has risen nearly 20% over the past year due to favorable market conditions. The Marsh Global Insurance Market Index shows that global commercial insurance pricing rose 6% in Q3 2022, marking the 20th consecutive quarter of price increases.

Buy Marathon Petroleum stock

The second-ranked stock in Mill Street’s top buy ideas is Marathon Petroleum Corporation (NYSE: MPC), a downstream energy company with the largest refining system in the US.

Marathon’s stock performance over the past year has been even more impressive than Everest Re, with a 44% increase. Analysts expect further gains in 2023 due to lower fuel levels, as Marathon is reducing its refiner capacity from 94% in Q4 2022 to 88% in Q1 2023.

Lower fuel levels means rising prices. Barrons quotes BofA Securities analyst Dough Leggate as saying in January: “Three weeks into the new year, we see tailwinds building again for U.S. refiners.”

Sell Western Digital Corporation stock

Western Digital Corp (NASDAQ: WDC) has risen 35% since the start of 2023 due to reports of progressing merger talks with Kioxia Holdings. The combined entity would dominate the NAND flash market with a 33% market share. This isn’t the first time Western Digital and Kioxia have been in talks to merge and you can read our 2021 analysis here.

However, Mill Street’s quantitative analysis suggests selling Western Digital’s stock, as the company is facing a falling demand for computer components and is not expected to see a profit in 2023. Furthermore, Western Digital’s net income for the September quarter collapsed from $636 million the previous year to $34 million. Investors holding Western Digital stock should not wait for confirmation of a merger deal and instead sell the stock.

Sell First Republic Bank stock

The second-ranked stock in Mill Street’s top stocks to sell is First Republic Bank (NYSE: FRC), a full-service bank and wealth management company primarily located in New York, California, Massachusetts, and Florida. While bank stocks have been popular as interest rates rise, First Republic Bank is no exception with a nearly 17% gain since the start of the year.

However, a January 2023 letter by asset manager Giverny Capital partially validates Mill Street’s bearish call for the stock (the fund is a long-term bull), at least in the near-term. It notes that First Republic was affected in 2022 as short-term loan rates rose faster than long-term loan rates amid expectations of a recession.

To quote the letter:

it costs more to borrow money for a year than for 10 years. For First Republic, this means it is paying high rates on Certificates of Deposit (CDs) to customers, but then lending that money to long-term borrowers for only a bit more yield. Banks depend on a healthy spread between their cost of deposits and what they earn on loans.