Paul Harris' Top Picks: March 16, 2022

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Paul Harris' Top Picks

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

FOCUS: North American and global stocks

MARKET OUTLOOK:

We are in a period of extended volatility with the Ukraine-Russian crisis, particularly with the Federal Reserve guidance after the rate increase announcement.

The Ukraine crisis will certainly continue to cause a fair amount of volatility as the situation remains fluid, suggesting a need for energy security in Europe and a move to green energy. The shift in gas and oil dependency has also solidified a closer relationship between Europe and the U.S., something that had deteriorated during the Trump years.

As the Federal Reserve increases rates and reduces their balance sheet, we should continue to see volatility in stocks and bonds until we have the first-rate increase and the market gets an understanding of the path forward.

The Fed is in a difficult situation as the yield curve (2-10) is quite flat, indicating slower growth already.

While inflation may remain at elevated levels in 2022, we expect supply chains will adjust over the year. We continue to believe as the economy normalizes we will see slower growth, and lower inflation. One thing we do know is that great companies will persist. If you owned a mediocre business heading into this pandemic, it is unlikely that the company will be a better business after COVID-19. We continue to believe that technology, healthcare and healthcare technology, financials (Canadian and U.S. banks) will continue to do well.

TOP PICKS:

Paul Harris' Top Picks

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, discusses his top picks: FirstService Corp, Zebra Technologies Corp., and Stryker Corporation.

FirstService Corp (FSV TSX)

The company focuses on residential property management and services (California Closets). It has room to grow market share in the U.S. in what remains a very fragmented business. The company has grown through acquisitions and organic growth. Trades at 30 times next year’s earnings and yields 0.60 per cent.

Zebra Technologies Corp. (ZBRA NASD)

Zebra manufactures and sells marking, tracking and computer printing technologies. Its products include thermal barcode label and receipt printers. They also provide RFID smart label printers/encoders/fixed, handheld readers/antennas, and card and kiosk printers that are used for barcode labeling, personal identification and specialty printing — principally in the manufacturing supply chain, retail, healthcare and government sectors. The company benefits from the further move to e-commerce. The stock trades, at 23 times earnings, has substantial earnings potential, a strong balance sheet and very strong free cash flow.

Stryker (SYK NYSE)

Stryker is one of the world’s leading medical technology companies. The company offers innovative products and services in orthopaedics, medical and surgical, neurotechnology and spine. With the acquisition of Wright Medical, it will also have products for hands and ankles. Their products, overall, 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 6 per cent in emerging markets. Great demographic play comes as the population ages. There is somewhat of an annuity with Med Tech products, as surgeons tend not to change their practice and equipment. 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 $3.3B of free cash flow in 2022 of which ~25 per cent is being used for dividends. This still leaves the majority of SYK's annual free cash flow that could be used for M&A and pay down debt. They cover their interest payments 11.4x and have a high free cash flow conversion rate. Recent purchase price of $116 range in February 2021