Mar 13, 2023
Lorne Steinberg's Top Picks: March 13, 2023
Lorne Steinberg's Top Picks
Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: Global value stocks and high-yield bonds
Recent comments by the U.S. Federal Reserve indicate that there is a high probability of further interest rate hikes, as the jobs market remains strong and wages are rising. With the war in Ukraine now in its second year, food and energy prices continue to put upward pressure on inflation. All of this has contributed to ongoing market volatility.
However, regardless of the short-term fluctuations, there is reason for optimism. China is opening up, supply chain pressures are abating and the semiconductor shortage should be resolved by the end of next year. Consumer spending has held up reasonably well, despite higher interest rates and while the financial sector is experiencing increased loan losses, banks are well-capitalized.
Against this backdrop, the economy remains fairly resilient and the bond market is indicating that interest rates will probably moderate somewhat over the next couple of years as inflation subsides.
Most importantly, valuations have adjusted to the rise in interest rates and some of the sectors which have been most impacted over the past year now offer compelling opportunities for investors.
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Most recent purchase: March 2, 2023, $247.09
The decline in the price of Microsoft shares has led to an excellent entry point for this unique company. The company has successfully leveraged its cash flow from Windows and Office, to become a leader in cloud computing, its fastest-growing vertical. Its recent $10 billion investment in OpenAI, the owner of ChatGPT, has positioned the company as an early leader in AI, which has the potential to boost its search engine (Bing) into becoming a more significant competitor in that lucrative area.
At the current price, the shares are compelling. Revenues are still growing at eight to 10 per cent over the next few years, with significant free cash being allocated to growth initiatives (including AI), dividend growth and share buybacks.
Most recent purchase: March 3, 2023, $11.09
Viatris was formed by the merger of Mylan with the Upjohn division of Pfizer. About half of its revenues are from branded drugs (Lipitor, Xanax and Viagra), with the balance from generics, over-the counter-products and its recently acquired eye care businesses.
The company recently sold its biosimilars business for $2 billion and is using the proceeds to for acquisitions, debt reduction and share repurchase.
In terms of valuation, this is the cheapest stock we own, as it trades at a P/E of less than four. At the current price, investors should be very well rewarded over the coming years, while earning a dividend yield of 4.7 per cent.
Universal Music Group N.V. (UMG AMS)
Most recent purchase: March 2, 2023, Euro 26.53
UMG is the global leader in music – both recorded and publishing with more than 50 labels. It is home to many of the greatest-selling artists of all-time (The Beatles, Rolling Stones, U2, Lady Gaga, to name a few). Streaming and subscription services now account for the vast majority of revenues. There are only three major companies of size and UMG is 50 per cent larger than the next largest competitor.
This company was spun out of Vivendi in 2021, so it is a relatively new public company. This business has healthy profit margins and strong growth which should translate into rising profits and free cash flow for years to come. The shift to streaming has increased the monetization of music, and UMG is the major beneficiary. A number of well-known artists have recently sold their catalogues at hefty valuations which gives some idea of the underlying value of this unique business.
Past Picks: April 6, 2022
ADOBE (ADBE NASD)
- Then: $444.33
- Now: $328.82
- Return: -26%
- Total Return: -26%
KERING SA (KER EPA)
- Then: €557.10
- Now: €547.40
- Return: -2%
- Total Return: 1%
Middleby Corp. (MIDD NASD)
- Then: $152.18
- Now: $142.99
- Return: -6%
- Total Return: -6%
Total Return Average: -10%