Lorne Steinberg's Top Picks: April 6, 2022

Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high yield bonds

MARKET OUTLOOK:

The war in Ukraine and the accompanying sanctions by most western countries will result in higher inflation and slower growth than previously forecast. At the same time, many companies are rethinking their supply chain strategies, and although globalization is not dead, there will be more focus on security of supply versus simply efficiency.

In response to the elevated inflation rate, it appears that the Fed will raise rates and unwind its balance sheet more aggressively than anticipated. Simply put, this is the end of the “zero-interest rate” era. However, this is not necessarily bad for investors.

The higher rates will impact borrowers, and probably cool down the housing market, but wages are rising and consumers are in good enough financial shape to handle the increased cost.

The bond market is indicating that the current elevated inflation rate will prove to be transitory, and that inflation will abate at least somewhat over the next year. Several sectors of the market have sold off, and offer excellent value. These include banks, technology and consumer cyclicals, all of which should do well over the coming years.

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TOP PICKS:

Adobe (ADBE NASD)

Most recent purchase price and date: March 7, 2022 @ US$442.856

Adobe is best known as the inventor of the PDF, but they are a diversified software company focused on its three major divisions: Creative cloud, document cloud and experience cloud. The company has leading market shares in its major businesses, with strong growth and free cash flow.

It continues to invest heavily in R&D while using excess cash for share buybacks and acquisitions. Revenues have more than doubled over the past five years while margins have expanded.

The shares sold off with much of the technology sector, giving investors the opportunity to buy this technology market leader at a compelling entry price.

Kering Sa (KER EPA)

Most recent purchase price and date: March 7, 2022 @ 530.3651 EUR

Kering is the luxury fashion house which owns Gucci, Saint Laurent, Bottega and several other brands. Gucci accounts for over 50 per cent of sales, but the company has done an excellent job revitalizing tired brands, such as YSL (now Saint Laurent), which is driving earnings growth.

The company is in strong financial shape, with a net cash position. It has a good track record at acquiring underperforming brands, and over the past few years it has used its free cash to raise the dividend and buy back shares. These shares have sold off due to COVID lockdowns in China and the Ukraine war. The shares are significantly undervalued with excellent growth prospects.

The Middleby Corporation (MIDD NASD)

Most recent purchase price and date: Nov 17, 2020 @ US$136.1197

Middleby is a global leader in commercial kitchen equipment, and also sells high-end consumer brands such as Aga and Viking. The company’s earnings proved to be surprisingly resilient during the pandemic, as the decline in commercial foodservice was partially offset by the food processing division.

The company has been a smart buyer of complementary brands over the years, and the business has tripled in size over the past decade. Europe accounts for about 25 per cent of sales, and the shares have declined due to recent events. This is a great opportunity to buy a best-in-class business at a significant discount to fair value.

PAST PICKS: January 22, 2021

CVS (CVS NYSE)

• Then: $74.12
• Now: $100.86
• Return: 36.07 per cent
• Total Return: 38.85 per cent

Electronic Arts (EA NASD)

• Then: $146.00
• Now: $126.74
• Return:  -13.19 per cent
• Total Return: -12.60 per cent

Goldman Sachs  (GS NYSE)

• Then: $289.39
• Now: $318.68
• Return: 10.12 per cent
• Total Return: 13.06 per cent

Total Return Average: 39.31 per cent