Lorne Steinberg, President, Lorne Steinberg Wealth Management
Focus: Global Value Stocks & High Yield Bonds
Top picks: Kimberly-Clark, Microsoft, Linde PLC
MARKET OUTLOOK:
The sudden selloff of cryptocurrencies and technology stocks is an indication that there has been a fair bit of speculation driving certain areas of the market. The market pendulum swings both ways, and when it swings too far it leads to opportunities.
At present, diversification is suddenly back in fashion. Consumer staples and cyclicals which have lagged the broader indices for years, have been the shining stars, while top tier financials, such as Canadian banks and insurance companies, have held up well. Many of these companies have had excellent track records of value creation, despite the fact that some of these shares have been unloved for a long time.
The message for investors is that diversification is a critical component of successful investing at all times, as market sentiment can shift faster than most investors can reposition their portfolios.
Any time there is a broad decline, there are opportunities, and this time is no exception. Among the carnage in the software sector lie some outstanding companies such as Adobe and Microsoft which have consistently delivered above-average growth while maintaining high profit margins and free cash flow generation.
Warren Buffett’s often-quoted line about buying when there is blood in the streets is applicable today. Investors shouldn’t worry about whether we have hit bottom, the question should be whether deploying capital today will generate strong returns over the next number of years. For us the answer is a strong “yes!”
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TOP PICKS:
Kimberly-Clark (KMB NASD)
Kimberly-Clark is the manufacturer of tissues, wipes, diapers and feminine hygiene products with iconic brands such as Kleenex, Scott, Huggies and Kotex. The company has been a dividend aristocrat, raising its annual dividend for 54 consecutive years. As with many companies in this sector, growth has slowed over the past number of years, while the company has allocated free cash flow toward share buybacks and dividends. The result is that the shares are trading at a 10-year low. However, the company is undergoing a significant change that should drive value for shareholders.
Later this year the company will complete its acquisition of Kenvue, the old consumer products division of Johnson & Johnson. Kenvue’s brands include Band-Aid, Aveeno, Johnson’s Baby and Neutrogena. The transaction will result in considerable cost savings and other synergies and should be accretive to shareholders while creating a leading personal care and consumer health business. The shares are compelling, given the low valuation (price-earnings ratio of 13) the five per cent dividend yield, and the opportunity created by the acquisition.
Microsoft (MSFT NASD)
Despite its recent strong earnings report, the share price has been weak due to the general selloff in the software sector due to fears of AI and the ramp up in capital spending. Investors are questioning whether companies such as Microsoft will realize their expected returns on these huge investments.
At the current share price, investors have the opportunity to buy what is arguably, the best positioned company in the sector. Microsoft is becoming the core vendor across the software, cloud and the AI spectrum, and the most important integrated vendor to large businesses. We expect earnings to rise by at least 50 per cent over the next three years, with significant free cash flow being used for strategic acquisitions, share buybacks and dividends.
The company has an impeccable track record of capital discipline, and we have little doubt that the planned capital expenditures will deliver the expected returns. At the current price, investors have the opportunity to buy one of the world’s great businesses at a compelling entry point.
Linde PLC (LIN NASD)
Following its 2018 merger with Praxair, this company is the world’s largest industrial gases company, as well as a designer of gas processing plants.
Linde provides customers with a wide variety of industrial gases that are essential inputs for a vast array of manufacturing processes.
The company’s customers cover a wide range of industries such as petrochemicals, food and beverage, electronics, and healthcare. The industrial gases industry is basically an oligopoly as barriers to entry are high, due to capital intensity, regulatory requirements, high switching costs and embedded infrastructure.
Of the three major competitors, Linde is generally regarded as the most operationally efficient, with the best technological knowledge base. The company has consistently delivered industry-leading growth due to operational excellence, pricing power, a disciplined acquisition strategy, as well as being at the forefront of investing in newer markets such as hydrogen and carbon capture solutions.
| Disclosure: | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| KMB NASD | Y | Y | Y |
| MSFT NASD | Y | Y | Y |
| LIN NASD | Y | Y | Y |
PAST PICKS: MARCH. 6, 2025
American Express (AXP NYSE)
Then: US$275.64
Now: US$358.05
Return: 30%
Total Return: 31%
Bank of Nova Scotia (BNS TSX)
Then: $68.88
Now: $104.00
Return: 51%
Total Return: 57%
Diageo (DEO NYSE)
Then: US$114.19
Now: US$96.71
Return: -15%
Total Return: -13%
Total Return Average: 25%
| Disclosure: | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| AXP NYSE | Y | Y | Y |
| BNS TSX | Y | Y | Y |
| DEO NYSE | Y | Y | Y |
