Paul Harris, partner and portfolio manager at Harris Douglas Asset Management

FOCUS: North American and global stocks

MARKET OUTLOOK:

Inflation has fallen from the highs of 2022 and is somewhere between 2.5 and three per cent. Central banks need to get to their two per cent target. This last one per cent will be the hardest in our view and will take longer than expected. Manufacturing costs no longer drive inflation as it was in 2022, but rather by services and housing, which brings us to our second issue interest rates.

Interest rates are certainly not going up from here, but we are more skeptical that they will be brought down as quickly as the market is implying. I think it is important to recognize that interests are normalizing, the 10-year bonds in the U.S. have averaged four per cent for the last 90 years. We believe that this normalization is important for investors and borrowers the lower rate environment from 2008 until 2022 forced risk-averse investors up the risk curve into equities and alternative assets. That caused the misallocation of capital by borrowers who invested in projects that are not economic at today’s interest rates. Today risk-averse investors can get a GIC (guaranteed investment certificate) between 4.5 per cent and five per cent. 

Valuation is at present quite high with the S&P 500 Index trading at 22 times earnings. We think a lot of good news is priced in the market: three interest rate cuts and multiple expansions with a commensurate increase in corporate earnings. We think we will see greater volatility in the next three to six months as we get further details of corporate earnings and move closer to the U.S. election. 

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TOP PICKS:

Stryker (SYK NYSE)

Stryker is one of the world’s leading medical technology companies. The company offers innovative products and services in orthopedics, medical, surgical, neurotechnology and spine and, with the acquisition of Wright Medical, will have products for hands and ankles. These products help improve patient and hospital outcomes. The company has 73 per cent of its business in the U.S., 21 per cent is International (developed markets) and six per cent in emerging markets. Great demographic play as the population ages the Stryker’s product become more useful and helpful, furthermore, there is somewhat of an annuity with med tech products as once surgeons start and learn they tend not to change. SYK is a well-diversified company and with its strong balance sheet should be able to manage through any macroeconomic pressures. SYK is generating nearly US$3.3 billion of free cash flow in 2024 of which about 25 per cent being used for dividends. This still leaves the majority of SYK's annual free cash flow that could be used for M&A and to pay down debt. They cover their interest payments 11.4 times and have a high free cash flow conversion rate.

Essilor Luxottica (ESLOY OTC)

Essilor Luxottica is a global leader in design, manufacture, and distribution of ophthalmic lenses, frames, and sunglasses. Essilor is a market leader across the entire value chain in eyewear. The global eyewear market offers attractive long-term resilient growth, especially when screen use has gone up exponentially. We see the Grand Vision acquisition as transformational and Essilor will be a winner in the digital transformation of eyewear. The stock has a dividend yield of 1.75 per cent, has a strong balance sheet and accelerating free cash flow growth.

Novo Nordisk (NVO NYSE)

NVO is a Danish multinational pharmaceutical company. Novo Nordisk is controlled by majority shareholder Novo Holdings A/S, which holds approximately 28 per cent of its shares and a majority of its voting shares. The diabetes and obesity care segment includes diabetes, obesity, cardiovascular, and emerging therapy areas. The rare disease segment refers to rare blood disorders, rare endocrine disorders, and hormone replacement therapy. The company major drug is Ozempic and Wegovy that continue to drive revenue and earnings. We believe we are in the early stages of these blockbuster drugs and the continue research that shows the drug helps reduce heart disease and stroke. 

PAST PICKS: May 11, 2023

Bank of America (BAC NYSE)

Then: US$27.39
Now: US$37.05
Return: 35 per cent
Total Return: 39 per cent

TD Bank (TD TSX)

Then: $82.17
Now: $79.04
Return: -4 per cent
Total Return: 1 per cent

Visa (V NYSE)

Then: US$231.01
Now: US$276.05
Return: 19 per cent
Total Return: 20 per cent

Total Return Average: 20 per cent