Barry Schwartz, chief investment officer and portfolio manager, Baskin Wealth Management

FOCUS: North American large cap stocks

MARKET OUTLOOK:

The September pullback has made me bullish on equities.

1. Valuations based on forward earnings are undemanding.  The S&P 500 is trading around 20 times earnings based on 2022 forward estimates.  With interest rates at these levels, this is an attractive setup.
2. There is good reason to believe earnings continue to grow for years as a result of strong pent up consumer demand, a need to rebuild inventories, supply chain crunch stretching out the demand cycle even longer, a boom in household and business formations, $2.5 trillion excess savings in the U.S., household balance sheets in the U.S. in great shape, and banks are sitting on way too much excess capital which should encourage lending to consumers and businesses.
3. Interest rates are crazy low and negative after fees, taxes and inflation. Even if rates rise from here, it is hard to justify owning fixed income securities.
4. China has become uninvestable which should encourage capital to flow to North America where businesses can operate more freely and which encourage premium valuations as a result
5. Business models in the U.S. are the best they have ever been. Less than 15 years ago, the S&P 500 was dominated by capital intensive, commodity, and cyclical businesses. Now it is dominated by capital light, high profit margin companies with global runways of opportunity.
6. It really seems the worst of COVID is behind us with breakthroughs in vaccines and treatments. Vaccine passports and mandates give consumers more comfort to attend return to work, attend large events and return to travel.
7. Due to takeovers and mergers, there is a lack of high quality growth companies. Scarcity creates should lead to a premium valuation for quality companies.

TOP PICKS:

Amazon (AMZN NASD)

Amazon presents a compelling opportunity for investors at these levels.  No question the stock needed a bit of cooling off after running up 80 per cent in 2020. That said, the business is firing on all cylinders. We believe that Amazon will post double-digit revenue growth for many years to come as it continues to dominate online retail and cloud computing. Amazon’s quarterly profit numbers will continue to be choppy as the company reinvests in its business but at some point its operating leverage will lead to significant earnings.

Paypal (PYPL NASD)

Dan Schulman and his team at PayPal are looking to build what Facebook cannot, the Super App.  The PayPal Super App will integrate banking, payments, shopping, messaging, investing and so many more services.  PayPal has gigantic ambitions to be one of the biggest tech giants. Do not underestimate the company that overestimates itself. If the rumor that PayPal wants to acquire Pinterest is true, then this is just one of many pieces, PayPal will need to reach its lofty goal. In the meantime, the company is growing very quickly and the recent pullback is a gift for patient investors.

Charter Communications (CHTR NASD)

After running up to over $800 a share, Charter Communications’ share price has pulled back almost 15 per cent.  Its competitors warned that cable subscriber growth will be more challenging going forward. This presents a good entry point as Charter is not facing the same issues as its peers. It is the lowest cost provider and continues to win new subscribers in both cable and wireless.  In the meantime, the company generates a significant amount of free cash which it is using to buyback shares hand over fist.

PAST PICKS: October 2, 2020

Apple (AAPL NASD)

• Then: $113.02
• Now: $149.60
• Return: 32%
• Total Return: 33%

Stryker (SYK NYSE)

• Then: $208.30
• Now: $276.51
• Return: 33%
• Total Return: 34%

TFI International (TFII TSX)

• Then: $57.30
• Now: $143.00
• Return: 149%
• Total Return: 151%

Total Return Average: 73%