Paul Harris, partner and portfolio manager, Harris Douglas Asset Management
FOCUS: North American and global stocks
MARKET OUTLOOK:
The U.S. Federal Reserve and other central banks reiterated that the priority remains the fight against inflation even with the fallout in the financial sector. This is not the financial crisis we experienced in 2008-09. We continue to believe in a “higher for longer” position from the Fed and the bond market has acknowledged this reality. We continue to believe that S&P 500 earnings have further to fall despite the recent downgrade.
Our expectation continues to be that this wave of negative earnings revisions will ultimately push the S&P 500 lower before the bear market is complete. Meanwhile, we continue to see a lot of complacency in the market, with the Cboe Volatility Index (VIX) in the 20s. We think you need to see the VIX closer to 35 before you can start discussing a capitulation bottom and the end of the bear market. Nevertheless, this is an opportunity to analyze and purchase some great companies that you wish to hold for the long term at reasonable valuations.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart, or wherever you get your podcasts
TOP PICKS
In our view current headwinds are transitory. A number of issues have led to the stock’s worst year so far since 2008, Apple shares have tumbled 23 per cent so far in 2023, steeper than the index which is down 18 per cent. One setback has been a series of shipment delays for Apple’s iPhone 14 Pro and Pro Max, stemming from COVID-19-related lockdowns given manufacturing disruption issues in China. We see these headwinds as transitory and investors should remain focused on the long-term opportunity. We remain focused on other areas of revenue growth for Apple, including its wearable products, such as watches and AirPods, and its services segment. New product launches should also help the company down the line. Services have a clear path to $136 billion in revenue by full year 2026, which will drive margin expansion and help smooth out the cyclicality inherent in the hardware business. Wearables also has a robust growth outlook, with a path to $70 billion in revenue.
It is a top search destination on the web and provides a leading search marketing platform for advertisers and merchants. The company continues to see growth in YouTube and its ability to monetize advertising. The stock trades at 18 times earnings. It will generate $50 billion in free cash flow in 2023 and has no debt. It has significant secular growth from internet advertising, a strong market share in search and other internet advertising segments. Google has a 30 per cent share of U.S. digital ad revenue and global ad revenue is expected to reach well over $400 billion in 2024 and digital advertising accounts for more than 50 per cent of total ad spend. The restrictions that Apple has put on iPhone help Google.
Visa is like a toll booth when you use the card Visa gets .15 basis points per transaction. It processes over 65,000 transactions per second. Today 17 trillion in consumer transactions still use cash and has good organic growth internationally. Visa still has growth in the business-to-business market, especially with loyalty programs. We think we will see an acceleration in revenue growth into the teens driven by three factors, including an improving macro backdrop, successful competitive changes around pricing and faster-than-anticipated consumer payment innovations such as mobile payments. Visa offers long-term secular-driven stocks especially benefiting from COVID-19 as more people use less cash, and should provide solid organic growth with opportunities for margin expansion. Visa is expected to generate 18 billion in free cash flow in 2023.
PAST PICKS: April 21, 2022
Walt Disney (DIS NYSE)
- Then: $121.66
- Now: $99.44
- Return: -18%
- Total Return: -18%
Zebra Technologies (ZBRA NASD)
- Then: $390.04
- Now: $305.14
- Return: -22%
- Total Return: -22%
Zoetis (ZTS NYSE)
- Then: $184.72
- Now: $166.93
- Return: -10%
- Total Return: -9%
Total Return Average: -16%
| DISCLOSURE | PERSONAL | FAMILY | PORTFLIO/FUND |
|---|---|---|---|
| DIS NYSE | Y | Y | Y |
| ZBRA NASD | Y | Y | Y |
| ZTS NYSE | Y | Y | Y |
Advertisement