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

FOCUS: North American and global socks 


The U.S. Federal Reserve and other central banks reiterated that the priority remained the fight against inflation rather than the support of economic growth. On the inflation (a lagging indicator) front, pressures moderated somewhat over the last few months. Nevertheless, core inflation generally remains well above central bank targets in most countries, which is why rates will continue to increase into 2023 albeit at a slower pace. On a positive note, equity market valuations have now generally fallen. For example, in the U.S., the market is currently trading on a price-to-earnings (P/E) ratio of 17 versus a long-term average of 16.

The 2023 S&P 500 earnings estimate has been brought down from a peak of just under $250/share to $234/share currently. Despite this earnings per share (EPS) downgrade, we continue to think earnings need to fall further. Therefore, we believe analysts still have more work to do to price in the looming weakness in corporate profits due to slower economic growth. 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 VIX closing the week at 22.6. 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.

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Paul Harris' Top Picks

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, discusses his top picks: Apple, Walt Disney, and Check Point Software.


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 2022, 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 have a robust growth outlook, with a path to $70 billion in revenue.

Zoetis (ZTS NYSE)

Zoetis is the largest public animal-health company. Zoetis was spun off from Pfizer in 2013.In 2018 U.S. pet owners spent $15.5 Billion on over-the-counter medicine and supplies and double $6.2 billion in 2001. Healthcare for animals has a certain advantage over health for humans. The industry doesn’t have content with pricing pressure from the insurance industry as most medical expenses are paid out of pocket. Developing drugs for pets, compared with humans, is generally faster and less expensive since it requires fewer clinical studies involving fewer subjects. Most companies try to find compounds that have worked in humans, so we don’t have to start from scratch. Generic drugs are less of a threat. The company has strong free cash flow growth, generating 2.0 billion in 2022, a strong balance sheet and covers interest on debt 14x and high conversion rates in free cash flow to net income.

Amazon (AMZN NASD)

Shares of Amazon have struggled this year, down almost 45 per cent, as the stock has been swept up in a broader tech selloff. We recognize the demand challenges facing Amazon’s retail business given macro, slowing AWS growth and lower operating income. We also believe Amazon can gain wallet share during these uncertain times and that adoption of AWS can accelerate through improved operating efficiencies and hiring freezes can deliver improving operating income. In November, the company announced plans for a staff cut of about 10,000, due to macro challenges and a previous flurry of hiring. It also paused corporate hiring in November. The online retail giant saw an uptick in its market share since the pandemic and has since roughly levelled to about 45 per cent of U.S. e-commerce. Furthermore, Amazon, along with Alphabet’s (GOOGL) Google and Meta Platforms (META) have dominated the share of new ad dollars brought into the ecosystem within the global digital ad market. With valuations near trough levels, and estimates already dialled back, we see much of that negativity as priced-in and see a favourable risk/reward among many internet stocks. This is a high-quality company, well positioned to outlast the near-term macro challenges and should come out ahead in the new landscape.




PAST PICKS: December 10, 2021

Paul Harris' Past Picks

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, discusses his past picks: Visa, Walt Disney, and Check Point Software.

Visa (V NYSE)

  • Then: $213.40
  • Now: $205.37
  • Return: -4%
  • Total Return: -3%

Walt Disney (DIS NYSE)

  • Then: $152.71
  • Now: $86.15
  • Return: -44%
  • Total Return: -44%

Check Point Software (CHKP NASD)

  • Then: $110.61
  • Now: $126.91
  • Return: 15%
  • Total Return: 15%

Total Return Average: -11%