David Driscoll, president and CEO of Liberty International Investment Management

FOCUS: Global stocks

MARKET OUTLOOK:

Year-to-date, global stock markets are rallying on the assumption that everything will be back to normal once COVID-19 has been put in the rear view mirror. The expectation is that central banks will keep interest rates muted and stock markets buoyant. By supporting risk taking with no potential losses, we believe there will eventually be a price to pay, either with a substantial re-valuation of equities or minimal returns in the next decade. Simply put, companies can’t grow this fast forever.

It also doesn’t help that brokerage analysts have fallen all over themselves to help promote the stock market. For example, using GAAP earnings, the current price/ earnings multiple on the S&P 500 Index is 29.9 times, among the highest multiples in its history. However, using adjusted earnings, which the analysts favour, the number falls to 22.5, which pundits argue is an appropriate ratio, given such a low interest rate environment. That’s financial engineering at its finest.

If future price gains become muted, stock selection becomes paramount today. The keys will be finding stocks whose valuations are realistic and whose free cash flow and dividends are growing. Earnings are artificial. Cash flow is real.

Avoid the noise. Instead of chasing the hot sectors based on short-term results, it’s better to own a fully diversified portfolio covering all sectors. For example, energy stocks lead the TSX 300 Index in total return in 2021, up 36 per cent, while the utility sector is up only four per cent. However, over the past two decades, utilities have outperformed energy stocks: +8 per cent vs. -6 per cent over 10 years and +10 per cent vs. +6 per cent over 20 years.

TOP PICKS:

CCL Industries (CCL/B TSX) manufactures specialty packaging for the consumer products market such as labels, aluminum / cardboard / plastic tubes, containers for cosmetics and RF & RFID tags for loss prevention and inventory management. If the economy is indeed re-opening, demand for labels and cosmetics should pick up. Despite a slowdown in its Avery label business, the company still grew its free cash flow by 16 per cent, leaving ample room for dividend growth. The stock is currently trading between 18 and 23 times earnings, not overly expensive.

Exponent Inc. (EXPO NASD) is an “asset light” science and engineering consulting firm that specializes in analyzing and solving complex problems that help prevent disasters and product failures. For example, its multidisciplinary battery team continues to see demand for its solutions in electric vehicles and energy storage. Profits and dividends have risen by 15 per cent to 20 per cent these past five years, a pattern that should continue in the coming years. It’s currently trading off its US$102 high so it’s a decent entry point.

Novo Nordisk ADR (NVO NYSE) is a large pharmaceutical firm, focused mainly on diabetes care but now expanding through joint partnerships into areas of liver and kidney disease and Alzheimer’s. The company recently announced FDA approval of Wegovy, a higher-dose version of its semaglutide diabetes drug. In company-funded studies, participants taking Wegovy had an average weight loss of 15 per cent, about 34 pounds. In the U.S., more than 100 million adults — about one in three — are obese. Wegovy builds on a trend in which makers of relatively new diabetes drugs test them to treat other conditions common in diabetics. For example, Novo Nordisk’s Victoza now has approvals for reducing the risk of heart attack, stroke and death in heart patients.

PAST PICKS: August 25, 2020

Atrion Corporation (ATRI NASD)

• Then: $672.00
• Now: $621.00
• Return: -8%
• Total Return: -7%

Analog Devices (ADI NASD)

• Then: $119.90
• Now: $165.22
• Return: +38%
• Total Return: +40%

Steris PLC (STE NYSE)

• Then: $154.59
• Now: $193.96
• Return: +25%
• Total Return: +27%

Total Return Average: +20%

Website: www.libertyiim.com