Lorne Steinberg's Top Picks: May 7, 2018

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

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MARKET OUTLOOK

The low unemployment rate, U.S. tax cuts and improving global economy suggest that the Federal Reserve may raise interest rates faster than anticipated. Equity markets in general are fully valued and rising rates are the major risk facing investors.

Although corporate earnings have benefited from the U.S. tax changes, this is already factored into valuations. Prudent investors should hold some cash, as we expect ongoing volatility. Several sectors of the market have already sold off, such as pipelines and consumer staples, as rising interest rates are already having an impact.

TOP PICKS

MORGAN STANLEY (MS.N)

Morgan Stanley has reinvented itself over the past five years, focusing more on wealth management, and less on trading. It's the largest wealth manager of the major Wall Street banks, and it's well positioned in the current environment. Earnings should grow over 10 per cent per year for the next two years, and the company is using excess cash to increase dividends and buy back shares. At the current valuation at 11 times earnings, the shares offer outstanding value.

ROYAL DUTCH SHELL (RDSb.N)

Royal Dutch Shell is in excellent financial shape, following its acquisition of BG a couple of years ago. That acquisition has proved timely, as rising oil price, and an improved cost structure have resulted in increased free cash flow. The 5 per cent dividend is secure, debt is being reduced, earnings are rising and Royal Dutch remains a “best in class” company. At the current price the shares offer an excellent total return opportunity.

HOSIDEN (6804.TYO)

Hosiden is a Japanese manufacturer of electronic components such as connectors, switches and acoustic components. Revenues and earnings are on the upswing and Hosiden is an example of another Japanese company trading at a very cheap valuation. The shares are trading at a discount to tangible book value, and a price-to-earnings of eight: compelling value.

AEGON NV (AEG.N)

Aegon remains very cheap. Earnings are up over 10 per cent this year, as Europe’s recovery remains on track. The dividend yield is almost 5 per cent and growing and the insurance sector is a beneficiary of higher interest rates.

• Then: $5.56
• Now: $7.00
• Return: 26%
• Total return: 26%

SUN LIFE FINANCIAL (SLF.TO)

Sun Life is executing well in all business units and earnings are growing at a healthy pace. The company is successfully building its brand in the U.S. and Asia.

• Then: $46.36
• Now: $53.02
• Return: 14%
• Total return: 16%

NIPPON ANTENNA (6930.TYO)

Nippon Antenna has returned to profitability and revenues are growing again. The company is trading at less than half of tangible book value and its cash accounts for almost the entire share price.

• Then: ¥595
• Now: ¥787
• Return: 32%
• Total return: 36%

Total return average: 26%

FUND PROFILE

The Steinberg Global Value Equity Fund is a deep value global equity fund focused on investing in companies which trade at a steep discount to their intrinsic value. These companies must meet stringent investment criteria both quantitative and qualitative including financial strength, track record and corporate governance. The fund is well diversified, and risk management criteria includes diversification by industry and geography. With a global value focus, the fund seeks the best values wherever they may be.

Performance as of: April 30, 2018

1 Month: 0.4% fund, 1.5% index

1 Year: 11.0% fund, 6.3% index

3 Year: 9.7% fund, 7.4% index

* Index: 30% S&P/TSX, 20% S&P500, 50% EAFE
* Returns are based on reinvested dividends and are net of fees.

TOP 5 HOLDINGS AND WEIGHTINGS

1. Morgan Stanley: 2.2%
2. Microsoft: 2.2%
3. Cisco: 2.1%
4. Koninklijke Philips N.V.: 2.0%
5. Manulife: 1.8%

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