Gordon Reid's Top Picks
FOCUS: U.S. stocks
As we move toward the closing quarter of a very interesting year, we are struck by how many outstanding issues are up in the air. First to come to mind of course is whether we’re going to gain control of COVID and whether from an investing standpoint a so-called re-opening trade will finally take hold.
Another current topic is monetary policy and whether we will witness not only the end of quantitative easing but an actual move to increase interest rates. Fiscal policy is front and center with a US$3.5 trillion spending package proposed along with a corporate tax hike to pay for it.
Also weighing on markets is the issue of inflation. Is it largely transient or is there a stickiness to it? How will these issues resolve themselves and what will be the effect on corporate earnings?
It appears clear to us that the event-driven recession brought on by economic dislocations caused by the pandemic interrupted a strong economic cycle that was in its middle innings. A further continuation of COVID affecting economic activity will serve only to delay and lengthen the cycle. There is no question that the pandemic not only accelerated budding societal changes but introduced new ones. Work habits have been altered, shopping trends accelerated, the housing market in urban and especially non-urban settings is flourishing and so on.
The employment market has seen a sea change. Corporations have invested heavily in technology to increase productivity in the face of an unpredictable labour force. Some sectors, industries and companies will come out winners and of course there will be losers.
Goodreid’s investment approach continues to be successful. Build portfolios that are broadly diversified by sector. Ensure that portfolios are adequately populated. Employ strong buy and sell disciplines. And finally, take a long-term view. Whenever one attempts to frame the market, the temptation is to focus on the near term as, on balance, investors value advice about tomorrow more than the longer-term. There’s no question that the short term is more actionable but unless the quality of the advice is superior those actions may in fact set an investor back. Many prospective Goodreid clients approach us with a derivation of the same theme; that is a list of securities with no long-term plan binding them together.
Let’s conclude with an intriguing fact. Corporate earnings are up almost five fold in the past 25 years. Inflation is up 60 per cent.
Freeport McMoRan (FCX NYSE)
Last bought $36.00 in Sept. 2021
Copper demand is up sharply on a cyclical basis but also on the back of secular trends. Seventy per cent of copper production is now used in applications supporting electricity, a trend that will continue for many years as the world becomes greener.
FCX is in a strong financial position, with investments in their Grasberg mine in Indonesia bearing fruit and their U.S. operations producing over a billion pounds of copper annually. At current copper prices, FCX is very profitable and should lead to a higher stock price. Any price increase in the commodity will correlate strongly with stock price.
Alphabet (GOOGL NASD)
Last bought $2,881.00 in Sept. 2021
This company is a 20+ per cent grower, top and bottom line, yet it’s trading at a relatively modest 28 times this year’s earnings. Revenue continues to be driven by their advertising business but look for Cloud and their “other bets” businesses to be strong contributors in the future. This is only the beginning. Other revenue sources sprouting from the US$20B annual R&D budget are positive wild cards.
JPMorgan (JPM NYSE)
Last bought $160.00 in Sept. 2021
Arguably the highest quality bank in the U.S., JPM has appreciated as it has become clearer that individuals and businesses were largely financially insulated by the government during the pandemic. As a result, much of the loan loss reserves booked in prior quarters and years are being released, boosting earnings.
Investment banking and capital market business will continue to drive profits as the economy slowly gets back on its feet. Loan growth and interest margins will be weak in the short term but will be fuel for future growth.
Past Picks: September 30, 2020
AbbVie (ABBV NYSE)
- Then: $87.59
- Now: $107.53
- Return: 23%
- Total Return: 29%
Hexcel (HXL NYSE)
- Then: $33.55
- Now: $58.70
- Return: 75%
- Total Return: 75%
Mondelez (MDLZ NASD)
- Then: $57.45
- Now: $60.29
- Return: 5%
- Total Return: 7%
Total Return Average: 37%