Full episode: Market Call for Friday, January 22, 2021
Lorne Steinberg, president of Lorne Steinberg Wealth Management
Focus: Global value stocks and high yield bonds
Despite the high number of COVID-19 infections and hospitalizations at present, the vaccine rollout should be completed in most countries by year-end, at which time the global economy will settle into a new normal. In the meantime, we expect governments to continue to borrow funds to support the economy, with central banks providing ongoing monetary stimulus.
All of this suggests that corporate earnings should rise substantially this year and next, most notably in those sectors which have lagged due to the pandemic.
While the Fed will probably refrain from raising short-term rates for quite some time, the bond market is behaving otherwise, as longer-term bond yields have been creeping up as of late in anticipation of the economic rebound as the world opens up. We expect this trend to continue, which would be a negative for investment grade bonds, but a big positive for the banking and insurance sectors.
Regarding valuation, the major market indices are certainly not cheap by historical standards, but within the markets there are many companies whose share prices offer compelling value, while others are trading at valuations which appear very stretched, to say the least. Investors who are focused on value should do well going forward.
CVS Health is arguably the best-positioned company in the U.S. healthcare delivery industry. U.S. reimbursement models are evolving to value-based care, and the company is leveraging its medical, pharmacy and lab data to deliver a lower cost, more effective model. Pharmacies can provide cheaper delivery of a number of services including administering the COVID-19 vaccine, which will help drive growth. CVS is using free cash flow to reduce debt, while maintaining a healthy dividend. At a P/E of 10, these shares offer compelling value.
The videogame industry remains a secular growth story, and EA is extremely well positioned to be a leader. One of the company’s major strengths is its long-term franchises such as Madden NFL, FIFA, Star Wars and others. The company boasts impressive free cash flow, which has been used to buy back shares, and continues to invest in growth initiatives. With annualized EPS growth of 10 per cent, and a healthy cash position, these shares should reward investors over the next several years.
Goldman Sachs is poised to benefit from the steepening yield curve, world-class investment banking and trading businesses, as well as its ongoing growth in wealth management. After a couple of years of sub-par performance, earnings have started to accelerate, capital ratios are strong, and free cash flow should drive ongoing share buybacks and dividend growth. At a P/E of 11, this company offers excellent value.
PAST PICKS: January 30, 2020
American Express (AXP NYSE)
- Then: $133.22
- Now: $126.05
- Return: -5%
- Total Return: -4%
Kering (KER EPA)
- Then: €561.20
- Now: €545.30
- Return: -3%
- Total Return: -2%
Manulife (MFC TSX)
- Then: $26.48
- Now: $24.20
- Return: -9%
- Total Return: -4%
Total Return Average: -3%
Company Twitter: @steinbergwealth
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