Lorne Steinberg's Top Picks
Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: Global value stocks and high-yield bonds
Elevated inflation, rising interest rates, a war in Ukraine and supply chain shortages; all of these issues which negatively impacted markets last year still exist, at least to some degree. It appears we will still be talking about them at the end of this year.
Against this backdrop, global growth is slowing, a recession may be on the way and central banks are maintaining a hawkish stance. However, despite the negative news, the outlook for investors is positive.
As we look forward inflation is moderating, while still high and the rising rate cycle should come to an end later this year. China is finally opening up and supply and demand are coming closer to equilibrium as capacity is increasing at the same time as the slowing economy is causing demand to weaken.
Finally, assuming there is a recession, we expect it to be a mild one. Past recessions have been accompanied by significant job losses, but this time around there is a shortage of labour. Corporate earnings may be down this year given the slowdown in economic activity, but this is already priced into the market.
The result of the steep drop in asset prices due to the above-mentioned factors is that many great companies are trading at compelling valuations.
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Kirin Holdings (2503 TYO)
Kirin is best known as the second-largest beer company in Japan, but it also produces domestic spirits and non-alcoholic beverages. The company owns substantial stakes in two Japanese public companies (pharmaceuticals and cosmetics/dietary supplements). These latter two holdings account for about 60 per cent of the share price, so one is buying the beer and beverage business for a very cheap multiple.
The company is generating significant free cash flow which has been used to fund share buybacks and dividends. At a P/E of 11, with a 3.3 per cent dividend yield, these shares represent outstanding value.
The decline in the price of Disney shares offers an excellent entry point for this unique company. The major reason for the drop is due to a slowdown in subscriber growth at Disney+. However, there is so much more to this company. Theme parks and linear networks (especially ESPN) should experience significant margin improvement this year and next.
The streaming platform is not yet profitable, but ad revenues, price increases and slowing content expense growth all lead to the conclusion that profitability for this division is not far off.
We anticipate double-digit annual earnings growth over the next several years, making these shares a compelling purchase.
Reckitt Benckiser Group PLC (RKT LON)
This consumer products company has a number of top brands in hygiene (Lysol, Finish), health (Strepsil) and nutrition (Enfa). The company has emerged from a reorganization (due to several management mistakes that have now been rectified) in excellent shape, as evidenced by a return to revenue, margin and profit growth. However, the shares still trade at a significant discount to its peers.
At a P/E of 17 with a three per cent dividend, yield investors have the chance to buy into a well-positioned consumer business with above-average growth potential.
Past Picks: January 27, 2022
Alphabet (GOOGL NASD)
- Then: $2,580.10
- Now: $99.15 (after 20-for-1 stock split on July 18, 2022)
- Return: -23%
- Total Return:-23 %
Universal Music Group (UMG AMS)
- Then: €22.00
- Now: €23.51
- Return: 7%
- Total Return: 9%
Viatris (VTRS NASD)
- Then: $14.59
- Now: $11.64
- Return: -20%
- Total Return: -17%
Total Return Average: -10%