Lorne Steinberg's Top Picks: September 6, 2023

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Lorne Steinberg's Top Picks

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Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high yield bonds

MARKET OUTLOOK:

Despite the onslaught of negative news, including the war in Ukraine, tensions with China, rising interest rates and the possibility of a recession, equity markets have held up well, but the gains have been narrowly distributed. The technology and internet and communication sectors have been the bright spots, as earnings have been strong.

However, interest rate-sensitive sectors such as financials, consumer and utilities have underperformed, as higher rates have dented the attraction of steady dividend payers, while the short-term earnings outlook for the banking and consumer sectors remains soft. Shares of banks have been particularly weak, due to fear of increasing loan defaults, especially for those backed by real estate.

Investors are focused on the U.S. Federal Reserve, and recent data indicate that inflationary pressures are abating as consumers feel the impact of higher rates. It should also be noted that governments are dealing with high debt levels due to the elevated fiscal stimulus of the past few years, leaving less room to boost spending during a downturn.

This suggests that as the economy slows, central banks will have some room to lower rates in 2024, which would be positive for those sectors that have lagged the market thus far.

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TOP PICKS

Lorne Steinberg's Top Picks

Lorne Steinberg, president of Lorne Steinberg Wealth Management, discusses his top picks: Allstate, CVS Health, ING Groep NV.

Allstate (ALL NYSE)

Allstate is an exceptionally well-run property and casualty insurer, as evidenced by its enviable track record of free cash flow generation. This company is a model of value creation, as it has repurchased over half of its shares over the past fifteen years, while growing its market share and raising dividends.

The insurance sector is suffering this year from increased catastrophe losses and the inflationary impact on claims. However, the company is raising premiums in response to these issues, while higher bond yields will also provide an earnings boost.

At the current price, the shares trade at about ten times 2024 earnings, with a three per cent dividend yield, offering significant upside with a comfortable margin of safety.

CVS Health (CVS NYSE)

CVS is arguably the best-positioned company in the U.S. health-care delivery industry. U.S. reimbursement models are evolving to value-based care and the company is leveraging its medical, pharmacy and lab data to deliver a lower cost, more effective model. Pharmacies can provide cheaper delivery of a number of services such as administering COVID-19 vaccinations, which will help drive growth.

Shares have been weak this year, due partly to the softer retail environment, as well as competitive pressures in CVS’ PBM business. That being said, the company is executing well, is adding a new business unit in the biosimilars area, and has the scale to improve margins and grow profits at a healthy rate.

CVS is using free cash flow to reduce debt, while maintaining a healthy dividend. At a price-earnings ratio of only eight, these shares offer compelling value.

ING Groep NV (ING NYSE)

ING is a European retail bank, with the majority of its business in the Netherlands, Belgium and Germany. It went through a major reorganization following the financial crisis and is now exceptionally well-positioned in terms of its core operations and its capital position. Earnings are strong and the company has embarked on a shareholder-friendly capital allocation strategy.

Excess cash is being used to pay dividends and buy back shares. The loan book is in excellent shape, and the shares are trading at a price-earnings ratio of seven, with a dividend yield of 5.5 per cent. At the current price, these shares are a real bargain.