Lorne Steinberg's Top Picks
Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: Global value stocks and high yield bonds
The war in Ukraine and shutdowns in China are adding to inflationary pressures and supply chain disruption. Both are negatively impacting economic growth and there is no way of knowing the duration of either event.
Elevated inflation will be offset somewhat by rising wages, but high gas and food prices are already taking a toll on the most vulnerable consumers. That being said, the aggregate consumer savings rate remains well above the long-term average, while the jobs market is exceptionally strong. These indicators suggest that if the economy does fall into a recession, it will probably be a short duration.
We are already witnessing the impact on corporate profits, especially in the tech sector, as growth stocks are being punished for falling short of expectations. However, even cheaper sectors of the market, such as banks, are also under pressure. As is often the case, when investors are fearful, funds flow out of riskier places such as emerging markets, into the U.S. dollar.
There is much debate as to whether the Fed is behind the inflation curve and will have to raise rates more aggressively to catch up, or whether they will end up raising rates too much, and thus cause a deeper recession. This is indicative of the uncertainty facing all of us as we try to navigate markets in the present environment.
It is important to note that despite the gloom and doom, there is reason for some optimism. Inflation may be close to peaking, which would relieve some pressure on the Fed to hike rates aggressively, while there remains pent-up demand by consumers and corporations due to the supply chain issues. At the same time, a market sell-off always creates opportunities to pick up some great companies which have been unduly punished.
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Cisco Systems (CSCO NASDAQ)
Cisco is the global leader in networking systems and has evolved its product suite over the past few years to encompass network security and cloud-based solutions. The product mix continues to shift toward higher margin software and services, and after several years of minimal growth, revenues are on the upswing.
The company has always been a free cash flow machine, and has allocated excess cash toward share buybacks, dividend increases and strategic acquisitions. At the current share price, the shares offer a three per cent dividend yield, with excellent total return potential.
Goldman Sachs (GS NYSE)
Goldman Sachs is poised to benefit from the steepening yield curve, world class investment banking and trading businesses, as well as ongoing growth in wealth management. Bank shares have been particularly weak as of late, and Goldman Sachs is no exception. It boasts strong capital ratios and best-in-class position in core businesses such as investment banking and trading.
The company generates significant excess capital, which has driven shareholder value creation over the past many years. With the market sell-off, the shares trade at a compelling value with a price-to-earnings of nine, and price-to-tangible book value of 1.0.
Unilever PLC (UL NYSE)
Unilever is the well-known global consumer products giant, with such brands as Dove, Hellman’s, Knorr and Vaseline. It has built a strong presence in the emerging markets over many years, with strong global distribution.
The company has had an excellent track record of consistent earnings and dividend growth, while focusing acquisitions on buying niche brands. At a price-to-earnings of 12 with a four per cent dividend yield, the shares offer excellent value.
PAST PICKS: May 27, 2021
HomeServe PLC (HSV LON)
- Then: £924.50 GBP
- Now: £1102.00 GBP
- Return: 19%
- Total Return: 22%
Allstate (ALL NYSE)
- Then: $136.30
- Now: $129.81
- Return: -5%
- Total Return: -2%
Morgan Stanley (MS NYSE)
- Then: $90.30
- Now: $79.92
- Return: -11%
- Total Return: -8%
Total Return Average: 4%