Lorne Steinberg, president of Lorne Steinberg Wealth Management
FOCUS: Global value stocks and high yield bonds
Thus far, the Fed has done a masterful job keeping the stock market rally going, while slowly reversing interest rate policy. In addition, markets would react positively if the U.S cuts corporate taxes. That being said, valuations are not cheap, global debt levels are worrisome, and rising rates are ultimately not a positive. Higher valuations suggest that investors should be preparing for a pullback by raising cash and reducing exposure to over-valued sectors of the market, such as pipelines and utilities.
This bull market started when valuations were cheap and interest rates were declining. Neither is the case today, which suggests a more prudent course of action.
DowDuPont is the company formed by the merger of Dow and DuPont. The plan is that this company will be split into three separately traded companies: specialty chemicals, materials and agro-sciences. There will be significant cost savings and synergies which will boost free cash flow, and result in combined dividend increases and share buybacks. All three units are extremely competitive and will be global leaders. Over the next five years we expect that the combined value of these businesses will be double the current share price, offering attractive upside for a market leader.
MANULIFE FINANCIAL (MFC.TO)
Interest rates are rising, and Manulife is perfectly positioned to benefit. We expect excellent earnings growth in all segments, led by Asia and the U.S. The John Hancock business has been performing particularly well, despite earlier rumours of an impending sale. With profits rebounding in the financial services sector in general, that division would command a premium price if divested. The balance sheet is in excellent shape, and the company is positioned to deliver 8 to 10 per cent annual earnings growth for the next several years. At 13 times earnings, this is a very attractive investment in an expensive market.
KAWASUMI LABORATORIES (7703.TYO)
Kawasumi Labs manufactures disposable medical devices such as dialyzers, blood tubing lines and many others. The company is a consistent free cash flow generator, with earnings on the upswing. This is another Japanese “golden opportunity." The company has no debt, while the net cash and accounts receivable are greater than the share price. Investors are buying the cash and receivables at a discount and getting a profitable, dividend-paying company for free!
PAST PICKS: NOVEMBER 24, 2016
CISCO SYSTEMS (CSCO.O)
Cisco remains one of the cheapest stocks in our portfolio. Net of cash, this great company is trading at a P/E of 13.
- Then: $29.89
- Now: $34.31
- Return: 14.80%
- Total return: 18.91%
ING GROEP (ING.N)
ING is a retail bank, well-positioned to take advantage of growth in Europe. With earnings growing at 8 to 10 per cent and a 4.2 per cent dividend, the shares remain compelling at 12 times earnings.
- Then: $13.80
- Now: $18.51
- Return: 34.16%
- Total return: 40.12%
AIDA ENGINEERING (6118.TYO)
Aida is benefitting from a rebound in global manufacturing. We anticipate double-digit earnings growth over the next five years.
- Then: ¥1,002.00
- Now: ¥1,327.00
- Return: 32.43%
- Total return: 37.59%
TOTAL RETURN AVERAGE: 32.20%
Steinberg Global Value Equity Fund
Performance as of: September 30, 2017
1 Month: 2.3% fund, 2.6% index
1 Year: 19.8% fund, 13.9% index
3 Year: 8.5% fund, 8.3% index
*Index: S&P/TSX, 20% S&P500, 50% EAFE
*Returns based on reinvested dividends and are net of fees
TOP HOLDINGS AND WEIGHTINGS
- Morgan Stanley: 2.4%
- Hosiden Corporation: 2.1%
- Manulife Financial: 2.0%
- Koninklijke Philips: 2.0%
- Corning: 1.9%