Hap Sneddon's Top Picks
Hap Sneddon, president and chief portfolio manager, Castlemoore
FOCUS: Technical analysis
Recent buying has shown investors have a commitment to the theme that the inflationary bear market of the last couple of years is over. At present, markets are rewarding a growth posture based on expectations that interest rate increases have finished (long duration is back on) and that some of the larger and high-profile companies are reporting quality earnings.
In the short run, we have entered a seasonally soft spot, particularly for technology. Historically, technology weakens from the first week in June to the end of the month. True to form, we have seen managers and investors bid up the market at the end of the old and the start of the new month, and thus, help to set the stage today for this mean reversion trade.
On the longer-term outlook, growth based on the relative price-to-sales ratio is the cheapest it’s been since 1960, including the 2000 and 2008 crises. However, a full commitment to growth today could be early as long rates are reaccelerating. Yields are telling us that there’s more to the inflation story.
The next two weeks will reveal much to support or refute the trend in rates as we have U.S. Federal Open Market Committee meetings on June 13 and June 14. Recently, many voting governors have been on the record reminding investors that inflation has not been vanquished and that there is more work to be done still. In the interim, May’s ISM Non-Manufacturing PMI on Wednesday will be a closely watched data point by the U.S. Federal Reserve and investors.
All this said, the eventual resolution of the current inflationary environment, including stock price impact, does set the stage for a decent secular move in equities. The forecast says that we’re just not there yet.
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Investors holding this ETF benefit when long-term U.S. interest rates rise. In response to lasting inflation readings at the time, long-term yields entered their first bull market since 1982 a year ago (April 2022). In this first move off the COVID-19 low of 0.4 per cent, 10-year U.S. Treasury yields peaked near 4.20 per cent last fall and then corrected to 3.25 per cent. In the recent technology stock surge, yields only fell from 3.87 per cent to 3.57 per cent. They are currently well-bid at 3.7 per cent. This security is a broad-fitting portfolio hedge and is counter-seasonal (historically bonds are a late-spring-to-fall hedge against market weakness over the summer). It’s all about inflation and the Fed still, even if markets don’t understand it yet.
This stock is technically strong with a good line in the sand at $56.50 for traders. The company has reported a 50 per cent increase in sales over the last couple of years though total margins are down. U.S. margins are near 60 per cent while international are at 34 per cent. As the company grows overseas there is margin expansion potential as it gets a better handle on input costs, like aluminum, freight, packaging, and ingredients. Molson Coors (TAP) is an alternative selection in the space with similar upside, or if one prefers a broader look, the Invesco Dynamic Food and Beverage ETF (PBJ) is attractive as well.
This stock is another demutualization story that is still under-appreciated by the markets and presents a long-term investment opportunity to investors. In 2021 Definity became the parent company of Economical Insurance, Family Insurance Solutions Inc., Petline Insurance Company, and Sonnet Insurance Company. Recent earnings showed good top-line growth +11 per cent surpassing street expectations and management’s stated target. Besides the subdued story around the company, the earnings also had some mushiness that, together, is why there is a buying opportunity today. Definity’s combined ratio – or the cash that flows out for dividends, expenses, and losses – was 101 per cent suggesting it needs to work on its underwriting. Management expects price increases in its channels and unreported investment income (not part of the combined ratio) to set the company up well for a big increase in the bottom line for 2024 and beyond.
PAST PICKS: April 4, 2023
Palo Alto Networks (PANW NASD)
- Then: $196.56
- Now: $225.04
- Return: 14%
- Total Return: 14%
Palantir Technologies (PLTR NYSE)
- Then: $8.35
- Now: $14.97
- Return: 79%
- Total Return: 79%
Berkshire Hathaway (BRK.B NYSE)
- Then: $309.07
- Now: $327.78
- Return: 6%
- Total Return: 6%
Total Return Average: 33%