JoAnne Feeney, partner and portfolio manager, Advisors Capital Management
FOCUS: U.S. equities
MARKET OUTLOOK:
Economies are facing significant, coordinated, global risks (war, China’s zero-COVID policy, shortages, inflation, rates, energy) so volatility is not going away anytime soon because new data will disrupt expectations. But some of those risks are likely to abate over the next year; inflation, shortages and energy. The U.S. is still (and likely to remain) relatively healthy.
On average, stocks are not especially cheap, but dispersion in valuations is unusually high so opportunities exist for the selective investor. Look for companies exposed to strong, long-lasting, secular drivers and ride out any near-term weakness. Or build a portfolio for income. You can get yields of four-to-five per cent or more with very high-quality companies. You may not catch the bottom, but do you need to? No.
Global economic conditions suggest Europe and China face more challenges from multiple sources (war, shortages, inflation, and zero-COVID policy) as compared to U.S. and Canada. A European Union recession is very likely, while a U.S. recession is less so as firms are still having trouble filling open positions. Expect to see goods production slow further while services remain a strength.
Even with a recession, investors recognize that all recessions end and they want to be positioned for a recovery in outlooks. Seeing dramatic shifts in expectations as investors are eager to be invested for recovery, but they don’t want to be there too soon – so have sudden reversals as investors are doused with cold water by the news.
Markets are priced for slow aggregate growth and reductions in second-half earnings estimates, so it might be a good time to add higher growth positions for long-term investors. We prefer high-quality companies with strong secular growth opportunities (AMZN, AVGO) and recession-resilient companies, such as TJX and MCD
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TOP PICKS:
Semiconductors and software provider with market leadership in each product line it provides. AVGO has developed deep moats over time and so it maintains high margins; the increase in software as a share of the business will likely cause margins to move still higher. Its history of smart acquisitions has added value and market strength. It generates ample free cash flow to both raise its dividend annually, conduct mergers and acquisitions, and/or buy back shares to deliver value for shareholders.
This off-price retailer has typically been resilient in the face of recessions. First, consumers tend to shift down from mainstream retailers to take advantage of the bargains and that raises sales and profits. Second, its inventory is sourced from other retailers that have failed to sell all the goods it purchased. In the summer and fall, mainstream retailers have been suffering from excess inventory so TJX should be picking up inventory at low prices.
Advanced Micro Devices (AMD NASD)
Advanced Micro’s new suite of microprocessors has demonstrated performance advantages over its chief rival, Intel, so AMD has been taking market share, especially in servers where prices and margins are the highest. While the slowdown in consumer PC and game console sales this year creates headwinds, the server share gain opportunity may make it possible for AMD to exceed expectations over the next several quarters.
PAST PICKS: May 14, 2021
XPO Logistics (XPO NYSE)
- Then: $146.05
- Now: $49.13
- Return: -42%
- Total Return: -42%
StoneCo (STNE NASD)-Sold
- Then: $59.21
- Now: $11.74
- Return: -80%
- Total Return: -80%
BioNTech (BNTX NASD)
- Then: $192.77
- Now: $137.55
- Return: -29%
- Total Return: -28%
Total Return Average: -50%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| XPO NYSE | Y | Y | N |
| STNE NASD | Y | Y | N |
| BNTX NASD | Y | Y | Y |
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