Paul Harris' Top Picks
Paul Harris, partner and portfolio manager, Harris Douglas Asset Management
FOCUS: North American and global stocks
I think we are in a period of extended volatility with the Ukraine-Russian crisis, inflation and the Federal Reserve rate increase. I do believe we are in a recession or will go into a recession this year. The Ukraine crisis will certainly cause a fair amount of volatility as the situation remains fluid. It does make clear the need for energy security in Europe and the move to green energy has left them open to Russian aggression using gas as a weapon. It also has solidified a closer relationship between Europe and the U.S., something that had deteriorated during the Trump years.
As the Fed increases rates and reduces its balance sheet we should see continued volatility in stocks and bonds until the market gets a clear understanding of the path forward. The Fed is in a difficult situation as the yield curve 2-10 is quite flat and inverting which indicates slowing growth already. I have been in the fixed income market long enough to know the yield curve matters as an indicator. With volatility markets, I would like to emphasize the importance of financial planning and asset allocation for clients. Financial plans allow you to manage through these difficult times because you understand your long-term goals.
While inflation may remain at elevated levels for the remainder of 2022, we expect supply chains will adjust over time. We continue to believe as the economy normalizes, we will see lower inflation and a reduction in aggressive rate increases and a better stock market.
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FirstService Corp (FSV NASD)
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. It trades at 27.5x next year’s earnings and yields 0.60 per cent.
Zoetis is the largest public animal-health company. Zoetis was spun off from Pfizer in 2013. In 2018 U.S. pet owners spent US$15.5 billion on over-the-counter medicine and supplies and double US$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 start from scratch. Generic drugs are less of a threat. The company has strong free cash flow growth, generating US$2 billion in 2022, a strong balance sheet that covers interest on debt 14x and high conversion rates in free cash flow to net income.
The Walt Disney Company, commonly known as Walt Disney or simply Disney, is an American diversified multinational mass media and entertainment conglomerate. The purchase of the Fox assets along with the new streaming services makes it one of the best competitors to Netflix.
Disney’s film library is by far the best in the industry and spans all age groups.
From its US$60 billion in revenue, 41 per cent comes from parks, 36.5 per cent from media and the remainder is consumer and studio entertainment. Disney is expected to generate US$7 billion in FCF in 2022. It has high-interest coverage and converts 85 per cent of its FCF to net income. Disney+ its new streaming services has grown rapidly and is a real competitor to Netflix. The parks business continues to show momentum as COVID subsides.
PAST PICKS: May 12, 2021
Meta (FB NASD)
- Then: $302.55
- Now: $180.62
- Return: -40%
- Total Return: -40%
Alphabet (GOOGL NASD)
- Then: $2200.25
- Now: $2085.65
- Return: -5%
- Total Return: -5%
Stryker (SYK NYSE)
- Then: $244.76
- Now: $232.33
- Return: -5%
- Total Return: -4%
Total Return Average: -16%