Lorne Steinberg, president of Lorne Steinberg Wealth Management
Focus: Global value stocks and high-yield bonds

MARKET OUTLOOK

Corporate earnings are declining, while global economic growth is slowing – not exactly a great recipe for a bull market. However, with bonds yielding less than inflation, investors have been driving up stock prices in search of yield. The S&P 500 is now trading at a price-earnings ratio of 22 and the risk level is certainly elevated.

Buying expensive stocks never ends well, so investors should remain disciplined and focus on valuation. The valuation gap between the U.S. and other markets has widened and there are better values to be found in other developed markets. Prudent investors should also maintain a cash allocation to take advantage of potential opportunities in this volatile environment.

TOP PICKS

BANK OF NOVA SCOTIA (BNS.TO)

Scotiabank shares have been weak over the past several months due in part to its international exposure. This presents investors with an opportunity to pick up a high-quality business at an attractive price. Profit growth has been impressive, including in Latin America, and the bank is very well capitalized. Recent acquisitions in the wealth management unit should bolster earnings growth in coming years. With a 4.9-per-cent dividend yield and a reasonable valuation, these shares offer excellent total return potential.

DOW INC. (DOW.N)

Dow is once again an independent company after the breakup of DowDuPont. Dow is a materials science company with a focus on specialty packaging, performance materials and coatings. The company is generating significant free cash flow, which will be used for share buybacks and dividends. The recent pullback in the share price offers a good entry point, with a dividend yield of 5.5 per cent and a price-to-earnings ratio of 12.

YAMAHA CORPORATION (7951 TYO)

Yamaha is a global leader in musical instruments. Recent changes in capital allocation reflect the “new” Japan corporate model. Over the past few years, Yamaha has improved margins, increased dividends and bought back shares while debt-free. Earnings are expected to grow by over 10 per cent yearly over the next three years. With ongoing buybacks and dividend increases, these shares offer compelling value.

PAST PICKS: MAY 7, 2018

MORGAN STANLEY (MS.N)

• Then: $52.39
• Now: $42.99
• Return: -18%
• Total return: -16%

ROYAL DUTCH SHELL (RDSb.N)

• Then: $72.57
• Now: $66.97
• Return: -8%
• Total return: -1%

HOSIDEN (6804 TYO)

• Then: ¥1328.00
• Now: ¥1186.00
• Return: -11%
• Total return: -8%

Total return average: -8%

TWITTER: @steinbergwealth
WEBSITE: www.steinbergwealth.com
NEWSLETTER: www.steinbergwealth.com/subscribe