Brianne Gardner, senior wealth manager, Velocity Investment Partners, Raymond James

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

Much like last August, the market seemed to get a little ahead of itself. The S&P 500’s upward trend that started 10 months ago has not been broken but this pullback could swing the other way a little deeper. The index is now trading below its 50-day moving average, something that hasn’t happened since March of this year.

Seasonally, August and September are two of the weakest months of the year and considering the fact that we have been overdue for a larger correction, we are actually having quite mild volatility so far sitting just four per cent off the peak and no drops over eight since this rally began last October. The key question is if this is just a temporary pullback and the upward trend will continue, or if this is the beginning of the change in trend and a leading indication of the upcoming recession. Inflation is still trending lower and on track with historic norms.

The economy is still re-strengthening. Interest rates and yields look maxed out, despite the recent surge. Earnings have hit an inflection point. Estimates are turning higher. As we approach the end of the year, the economy may still be much stronger than expected with cooling down inflation and a resilient labour market. Most recessions do not come gradually and things can change in the blink of an eye. We still expect to see a recession – two consecutive quarters of gross domestic product (GDP) contraction – at the end of 2023 headed into 2024. Seasonally, it is time to be cautious headed into the fall, and our strategy in this environment is to focus on defensive sectors, de-risk portfolios, and quality strong businesses that can weather the storm, even if just a mild storm.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Canadian Natural Resources (CNQ TSX)

Oil stocks are turning upward again now, along with the price of oil which recently topped US$80 per barrel once again. CNQ has industry-leading free cash flows. This provides for a robust and sustainable business and dividends for shareholders. It offers a 4.42 per cent dividend yield in addition to its large share buyback program. Its debt-reduction and efficiency focus over the next few years puts the company in a better long-term position to endure the inevitable cyclical turns. A really well-run business, it’s had amazing revenue growth the last 10 years while keeping profit margins strong so that earnings growth has kept up. We see some attractive valuations in the oil and gas space, with some businesses still near 30-year low values, and CNQ is still good value.

Tourmaline Oil (TOU TSX)

Canada’s top natural gas producer. About 25 per cent as big as CNQ in market cap but roughly 40 per cent of the production. The price of natural gas is temporarily depressed so we believe an opportunity here. Target price of $85 on the street which gives us an expected return of 28 per cent plus the dividend of 1.5 per cent. It scores a perfect 10/10 from value score and 9/10 fundamental score with a consensus on the street of outperform. We believe that Tourmaline is positioned to improve its financial resiliency and boost shareholder returns. We are continuing to build a larger position in the portfolio.

Merck & Co (MRK NYSE)

This pharmaceutical company with divisions covering medicines, vaccines, biological therapies, animal health and health care products is very attractive in our opinion. Its earnings have steadily climbed for years, and the stock is up over 20 per cent over the past 12 months despite being flat year to date, while it has gained around 5.5 per cent just in the month of August. The stock remains attractively valued for a solid business and we believe it is poised for further upside. Its growth outlook remains robust, with management showing that it expects over 80+ potential product approvals by 2028. These developments are positive for investors as management expects to continue driving growth and returning cash to shareholders. We like health care as a favoured defensive sector currently to manage volatility and a potential recession.

PAST PICKS: June 2, 2023

Nike (NKE NYSE)

• Then: US$123.41
• Now: US$99.73
• Return: -19%
• Total Return: -18%

Verizon (VZ NYSE)

• Then: US$51.29
• Now: US$33.57
• Return: -35%
• Total Return: -29%

CCL Industries (CCL.B TSX)

• Then: $61.45
• Now: $60.56
• Return: -1%
• Total Return: 1%

Total Return Average: -15%