Jul 20, 2022
Darren Sissons' Top Picks: July 20, 2022
Darren Sissons' Top Picks
Darren Sissons, vice-president and partner, Campbell, Lee & Ross
FOCUS: Global and technology stocks
Investors should now be evaluating their risk management processes. Earlier in the year, major markets, excluding the oil-heavy TSX, were down 30 per cent, or 30 per cent in Canadian Dollars. The recent buy-the-dip notwithstanding, prudent investors should not be as negatively impacted. Key steps that protected capital were trimming 2021 winners; carrying a cash reserve; a diversified portfolio including exposure to energy, defensive sectors, and pharmaceuticals; and actively trading fixed income where applicable. The only reasonable exception for major portfolio declines is new investments added in mid-to-late 2021, which would be negatively impacted due to higher entry levels.
Crucial risk management considerations when evaluating portfolios now would include:
- Has there been significant trading to reduce losses?
- How bad was the drawdown prior to the recent buy-the-dip market lift?
- Was exposure to Meme stocks, unprofitable technology, Cannabis or other high-growth sectors too high?
- Was a cash buffer carried as a protection against market corrections?
If the answer is yes to any of questions 1-4, then re-visiting risk management protocols or perhaps re-evaluating your current manager is warranted.
Looking forward, the deployment of cash reserves into new opportunities will be a key value creator. Timing is obviously a factor. The U.S. is likely to raise interest rates by 0.75 per cent on July 27. Should rates be raised above the 0.75 per cent consensus, the markets will sell off and recent gains will be lost. However, when market averages are down +25 per cent, a real opportunity exists for longer-term, patient investors.
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BHP Group (BHP NYSE)
- It is an attractive, growing dividend, with the occasional special dividend.
- It has strong balance.
- Catalysts for new investors include:
- Jansen Potash mine in Saskatchewan.
- Any recovery in Chinese demand for copper and or iron ore, which drives 26 per cent and 57 per cent of revenue, respectively.
- From a technical perspective, the company reached a major resistant point at US$48/share.
- Mineral commodities typically produce positive returns of size during inflationary periods.
- BHP has generated an annualized Total Return of nine per cent in Canadian dollars for the last decade.
Nestle SA (NESN SWX)
- A progressive dividend currently yielding 2.43 per cent.
- Nestle, likely the best-of-breed food company, is experiencing some margin pressure from inflation but is well positioned to pass higher costs on to consumers.
- A defensive business model, operating on the safe-haven Swiss Franc. Management favours low-risk tuck-in acquisitions.
- In Canadian dollar terms, the dividend and total return have grown at an annualized rate of 6.2 per cent and 12.7 per cent, respectively since 2012.
- Growing dividend currently yielding 4.80 per cent.
- Good balance sheet with no near-term maturities until 2026 with scope for continued debt reduction.
- Several catalysts including:
- Ukraine conflict-induced higher oil prices.
- Renewables strategy.
- Elliot Management’s activist agenda, which targets unlocking value via a sale of the retail division, the appointment of the next chief executive officer and three board seats.
- At US$80 WTI per barrel, Suncor generates 35 per cent free cash flow.
- Commodities typically generate outsized returns versus other sectors during heightened inflationary periods.
PAST PICKS: July 26, 2021
Munich Re AG (MUV2 ETR)
- Then: €229.05
- Now: €220.70
- Return: -4%
- Total Return: 1%
Saputo (SAP TSX)
- Then: $35.87
- Now: $30.49
- Return: -15%
- Total Return: -13%
Vantage Towers AG (VTWR ETR)
- Then: €29.61
- Now: €28.14
- Return: -5%
- Total Return: -3%
Total Return Average: -5%