Chris Blumas, portfolio manager, Raymond James Investment Counsel
FOCUS: North American large caps
Top Picks: Brookfield, Abbott Laboratories, Great-West Lifeco
MARKET OUTLOOK:
Inflation is cooling across North America, and it appears almost certain that interest rate cuts are coming in the U.S. The big question for investors is when will the U.S. Federal Reserve start cutting interest rates and how aggressive will the cuts to interest rates be?
Central banks typically act with a lag and are data-dependent and do not want to stoke the flames of inflation. North American economies are struggling under the weight of higher interest rates and there is a plethora of data points that highlight how quickly economic growth is stagnating across the continent.
Looking at the stock market valuations for large capitalization, and high-growth companies, it is clear the equity markets have already accounted for a declining interest rate cycle and the likelihood of a soft landing. However, when you look at the valuations of lower growth companies in defensive sectors that tend to be more interest rate sensitive, valuations are much more reasonable and dividend yields are very robust.
Overall, I think it’s important for investors to remain well diversified and defensively positioned and avoid the temptation to chase returns without regard for valuation. In the end, the price you pay determines your rate of return and indiscriminate buying can often lead to poor returns.
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Brookfield (BN TSX)
Brookfield is a direct investor and third-party asset management firm with a unique focus on real assets and private equity. The company has a controlling interest in each of its publicly traded affiliates and a portfolio of other private investments. Brookfield is one of a handful of global private equity players that are uniquely positioned to raise large amounts of capital from institutional clients as they shift more of their portfolios toward private markets. While the company has four publicly listed operating subsidiaries (BAM, BBU, BEP, and BIP), the parent company has the unique ability to allocate capital across its platform and operate in a counter-cyclical manner. Currently, Brookfield has around $150 billion in group liquidity available to deploy across its platform and is uniquely positioned to benefit from weakness in the global macroeconomic environment. The shares currently trade around 12 times distributable earnings and have a core free cash flow yield of around six percent.
Abbott Laboratories (ABT NYSE)
Abbott is a medical equipment company with a strong international presence. The company’s two main profit centers are its medical devices business and diagnostic testing business. Last year, these businesses accounted for more than 80 percent of Abbott’s operating profit. Abbott is currently working through a decline in demand for pandemic-related diagnostic equipment. As a result, top line revenue growth is not reflective of the organic sales growth for the underlying base business. The shares currently trade around 22 times forward earnings and have a trailing free cash flow yield of almost 3 percent.
Great-West Lifeco (GWO TSX)
Great-West is a financial services holding company focused on providing insurance, investment management, and retirement services. The company has a mature market focus and operates in Canada, the U.S., and Europe. Great-West generates most of its profits in Canada and Europe and has made series of acquisitions in the U.S. retirement services market over the last few years. Going forward, I think management will do an excellent job generating accretive earnings per share growth and generating strong returns for shareholders. The shares currently trade around 10 times forward earnings and have a dividend yield of 5.3 per cent.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BN TSX | Y | Y | Y |
| ABT NYSE | N | N | Y |
| GWO TSX | N | N | Y |
TD Bank (TD TSX)
- Then: $85.96
- Now: $79.41
- Return:-8%
- Total Return: -3%
Yum China (YUMC NYSE)
- Then: US$56.78
- Now: US$33.68
- Return:-41%
- Total Return: -40%
CGI (GIB.A TSX)
- Then: $132.30
- Now: $147.24
- Return:11%
- Total Return: 11%
Total Return Average: -11%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TD TSX | Y | Y | Y |
| YUMC NYSE | Y | Y | Y |
| GIB.A TSX | Y | Y | Y |
