MARKET OUTLOOK:

While I don’t believe we are headed for an inflation spiral similar to decades ago, it is clear that supply constraints for labour and goods are ratcheting up costs and not all of these will be able to get passed on to end users. 

Reference to continued slack in the U.S. economy as a basis for maintaining policy accommodation is starting to be a riskier approach. It is possible we won’t get back the employment lost since the pandemic unless there is more vaccine take-up. 

Companies will compensate for this over time, by putting in place even more productivity enhancing technology, but the near-term could see either margin compression or slower overall consumption growth as households deal with increased costs on non-discretionary items and services. 

As we head into this week’s Federal Reserve meeting, the stakes are higher by the recent employment cost index stats. The 1.3 per cent gain in September was the highest on record and this has to move the Fed towards exiting QE faster than planned and may even bring forward rate hikes to the first half of next year instead of end of 2022. Throw in potential weather influences, as we are seeing play out with airlines, and expected energy shortages and the typical October correction may simply have been pushed out. 

For Canada, the elevation in stocks has to be taken against the dismal economic performance in the third quarter. The weakening in the Canadian dollar later in the third quarter should provide a boost to fourth quarter activity, but again we are seeing the loonie back to 80-cent plus levels. The TSX has been powered by strength in energy as crude oil pushes above US$80 a barrel and the indications from the U.S. energy patch is that higher profits make it more likely that the sector will see share buybacks and dividend increases. The risk is that we see more supply come on stream from OPEC+ at a time when demand might be negatively impacted by higher energy costs.

TOP PICKS:

Amgen (AMGN NASD)
Fundamentals are still positive even though the company has missed on last two quarters. At a trailing P/E of 14 and estimated P/E of 12.6, stock is trading very cheap against its peers. As we move out of the pandemic, a return to examinations and diagnosis should see demand for its molecular biological products improve. It also has a decent dividend yield of 3.4 per cent and 5yr growth of over 12 per cent. See this stock getting back to its half way mark from the selling that started in April – or around $230.

Restaurant Brands (QSR TSX)
The stock’s been hit on concerns that labour shortage and rising wages are going to cut deep into profits. But, as the economic re-opening continues and fast food opens up to dining in, this should see a strong improvement in revenues. Outside of the initial drop at the start of the pandemic, stock has found decent support around $70 and I think this will be the same thing this time around. This is the widest performance gap we’ve seen against McDonalds since QSR started trading at the end of 2014.

Stella-Jones (SJ TSX)
The aim here is on infrastructure. Given SJ’s niche in pressure-treated lumber, it lends itself to port construction, rail and utilities. While the dividend yield is relatively low, 5yr growth is double-digits. Also, expect home building to continue to grow at a strong pace, given housing shortage and price concerns.  One risk is that the stock has been unable to break above $53 on a sustainable basis, but a return to that level still gives us a 20 per cent gain from current levels. 

PAST PICKS: July 9, 2021

Ballard Power Systems (BLDP TSX) 

• Then: $21.15
• Now: $22.70
• Return: 7%
• Total Return: 7%

Teck Resources (TECK/B TSX) 

• Then: $29.28
• Now: $34.54
• Return: 18%
• Total Return: 18%

Barrick Gold (ABX TSX) 

• Then: $26.32
• Now: $22.71
• Return: -14%
• Total Return: -13%

Total Return Average: 4%