May 27, 2021

Lorne Steinberg's Top Picks: May 27, 2021

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Lorne Steinberg's Top Picks

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Lorne Steinberg, president of Lorne Steinberg Wealth Management

Focus: Global Value Stocks and High Yield Bonds

MARKET OUTLOOK:

As the vaccines roll out, the global economy will continue to rebound, buoyed by pent-up consumer demand, and ongoing government spending.

Pre-COVID, economists were concerned about the high levels of household debt, fuelled in large part by mortgage debt. One impact of the pandemic has been that the U.S. personal savings rate is at its highest level in over 50 years. Consumers are eagerly awaiting the opportunity to spend again, and global economic activity is forecast to exceed 2019 levels by 2022. This, at least partially, explains the ongoing stock market rally.

In contrast to consumer savings, government debt as a percentage of GDP is at its highest level since 1946, as government spending has continued unabated, and the U.S. Congress is debating further stimulus in the form of major infrastructure spending. However, it is important to note that a significant amount of this debt has been issued at very low interest rates, and thus the interest burden is less onerous than may be apparent.

One of the fears among investors is that the anticipated strength in the economy will be accompanied by a steep rise in inflation. Fear not! The data clearly illustrates that equity investors benefit from inflation.

TOP PICKS:

Lorne Steinberg's Top Picks

Lorne Steinberg, president of Lorne Steinberg Wealth Management, discusses his top picks: Allstate, HomeServe PLC and Morgan Stanley.

Allstate (ALL NYSE)

Allstate is arguably the best run property/casualty insurer in North America, with an outstanding track record of earnings and dividend growth. The company has an excellent history of profitable underwriting and is gaining traction with its Protection Services division, which provides insurance for mobile phones and other products. Significant free cash flow has been used primarily for share buybacks, dividends and acquisitions.

The shares are trading at a compelling valuation of only 10 times earnings, with a 2.4 per cent dividend yield, and will benefit from rising interest rates.

HomeServe PLC (HSV LON)

HomeServe is a provider of emergency assistance to homeowners, providing protection for plumbing and drainage, boilers, HVAC, electricals and kitchen appliances. They don’t underwrite policies themselves but rather act as an intermediary with underwriters, as well as provide the required handyman. Just over ½ of their 8.3m global memberships are in the U.S., but they also have significant operations in the U.K., France and Spain, as well as a growing on-demand repair service.

This is a fragmented industry and HomeServe has been the consolidator, using its scale to improve the reputation and margins of acquired businesses. There is ample room for continued growth, and we anticipate double-digit earnings growth for the next several years. At the current price, the shares offer excellent upside.

Morgan Stanley (MS NYSE)

Over the past decade, Morgan Stanley has successfully executed its plan to reduce exposure to trading and other riskier businesses, and has become the largest wealth management firm in the U.S. It recently acquired E*TRADE, which will add to the depth of this division.

Financials will benefit from rising interest rates, and Morgan Stanley is extremely well positioned in the current environment. Trading at a P/E of 12, the shares are cheap.