Michael Decter’s Top Picks
Michael Decter, CEO and CIO, LDIC Inc.
FOCUS: North American large caps
We expect a rebound in equity markets in the fourth quarter. We believe tax loss selling and “higher for longer” interest rates caused the decline in the third quarter. We expect the next interest rate move will be a reduction sometime in 2024. Earnings expectations for equities are low, which is likely a positive indicator for a rebound in the fourth quarter.
Our sector view is that energy, financials and industrials should do well in the Canadian markets. We expect the rebound in the U.S. equity markets to be broadly based.
Cautions remain. The investment climate in the U.S. is good but not great. The consumer may finally be exhausted. Student loan payments are resuming after the failure of U.S. President Joe Biden's initiative to cancel them.
Most importantly, the U.S. Federal Reserve’s tightening cycle is largely behind us.
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We like Sun-life given its peer-leading adjusted return on equity, which we feel has some room to move above the firm’s 18 per cent + medium-term target next year with the help of a recently announced three per cent buyback. Its return on equity target could also get a boost from its wealth business as it could have some room to move higher still. In terms of financials, the company has a very strong capital position with $2 billion of cash at the Holdco, which will give much optionality and flexibility. Finally, the company ranks at a lower risk profile than peers, with an over-emphasis on capital-light businesses including wealth and a U.S. group benefits business that reprices annually. As a result, we feel SLF is a well-positioned insurance name.
We like Surge given its positive correlation/sensitivity to commodity prices, particularly heading into the second half of 2023. Management has done a solid job on execution, which will help support an inflection to return on invested capital. From a capital allocation standpoint, there is a high probability that the company chooses to boost its dividend with optionality to buy back shares in the first half of 2024. Finally, its solid asset base is supported with multi-laterals with Sparky outperforming expectations and expanding with multi-lats. Overall, we see a solid set-up for the company with strong macro fundamentals supporting the stock.
Berkshire is a "bet on America." Berkshire is a holding company of various businesses, however, it’s primary businesses are insurance, rail and utility. Insurance subsidiaries include GEICO, National Indemnity, Alleghany and reinsurance General Re. The utility owns Berkshire Energy Company, PacificCorp, MidAmerican Energy and NV Energy (transmission, gas, wind, solar, hydro). Burlington Northern Santa-Fe Railroad.
Berkshire's investment portfolio holds stakes in Apple, Bank of America, American Express, Coco Cola and Chevron. Warren Buffet called 2022 a good year after Berkshire reported its highest-ever annual profit. In the second quarter of 2023, operating earnings rose more than six per cent making a new second quarter record.
Berkshire had a compounded annual gain of 19.8 per cent from 1965 to 2022 compared to 9.9 per cent for the S&P 500. Berkshire’s stock tends to perform best during market stress and uncertain times, usually when the U.S. dollar is doing well.The U.S. dollar is currently at its highest level since 2002. Berkshire's cash pile is close to an all-time high of $150 billion, allowing for share repurchase and the option to buy undervalued businesses.This cash pile is in U.S. Treasury Bills earning over five per cent. The stock is trading at an all-time high of $357 and is approaching an $800 billion market cap (so cash pile is 19 per cent of the current market cap). A market cap of $800 billion makes Berkshire the ninth largest company in the S&P 500.
PAST PICKS: June 22, 2023
AMAZON.COM (AMZN NASD)
- Then: US$130.15
- Now: US$126.26
- Return: -3%
- Total Return: -3%
ELI LILLY (LLY NYSE)
- Then: US$457.68
- Now: US$525.53
- Return: 15%
- Total Return: 15%
TOURMALINE OIL (TOU TSX)
- Then: $60.11
- Now: $66.71
- Return: 11%
- Total Return: 13%
Total Return Average: 8%