Alexander MacDonald, portfolio manager, GlobeInvest Capital Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

While geopolitical tensions are grabbing most of the headlines these days, it’s interest rates that are top of mind for investors. Since May, the U.S. 10-year yield has increased 150 basis points to just under five per cent. Rates have ticked up recently on a combination of things. This includes investors starting to believe the U.S. Federal Reserve when it says it isn’t cutting anytime soon, continued strong economic data in the U.S., and to a lesser extent, higher U.S. government spending requiring increased debt issuances. We just finished a 40-year downward trend in interest rates, so the current rate environment is uncharted territory for many investors. Higher rates have pressured equity valuations, especially income stocks that may have previously been viewed as bond proxies.

In terms of fundamentals, U.S. consumers continue to show strength, with last week’s third-quarter gross domestic product report surprising to the upside. That said, the savings rate is dropping significantly, down to 3.8 per cent from 5.2 per cent in the second quarter. Pre-pandemic, the rate was consistently above five per cent, so current levels look unsustainable. Half of the companies in the S&P 500 Index have reported third-quarter earnings so far, and 56 per cent of them have beaten earnings expectations. Anecdotally, management teams are largely constructive about how their businesses are performing, but they are keeping an eye on an economic slowdown.

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TOP PICKS:

RTX Corp. (RTX NYSE)

Last purchased Oct. 24 at $78.07

Roughly half of the company’s business is a defense; ongoing geopolitical tensions are likely to put a floor under defence spending. The company recently announced there were manufacturing defects in the engines it supplies for Airbus A320neo aircraft. Management estimates the repairs will cost the company $3 billion, yet the stock has shed roughly $30 billion in market cap since the announcement. While additional costs may arise, we like the margin of safety provided by the current valuation.

Alphabet (GOOGL NASD)

Last purchased Oct. 25 at $126.17

The company reported earnings last week that showed growth in its cloud computing division decelerated more than was expected, causing the stock to sell off. We don’t think this one quarter’s results are indicative of any long-term problems with growth at the company, especially as it has AI tailwinds. At just 19 times forward earnings we believe this is an attractive entry point for the stock.

Mondelez International (MDLZ NASD)

Last purchased Oct. 25 at $65.67

The company has the number one market share position in biscuits (cookies and crackers), and number two in chocolate. The stock has recently sold off on concerns that widespread GLP-1 weight loss drug adoption will impact sales of snack foods. We think this concern is overstated, and with 40 per cent of sales in emerging markets, the company’s products are less likely to be impacted.

PAST PICKS:

Chubb (CB NYSE)

• Then: US$201.67
• Now: US$211.09
• Return: 5%
• Total Return: 5%

Brookfield Corp. (BN TSX)

• Then: $46.21
• Now: $40.71
• Return: -12%
• Total Return: -12%

TD Bank (TD TSX)

• Then: $85.85
• Now: $76.88
• Return: -10%
• Total Return: -9%

Total Return Average: -5%