Stan Wong's Top Picks
FOCUS: North American large cap stocks and ETFs
With the start of a new year, we maintain a constructive outlook for equities in 2022. We see a repeat year of positive, yet more moderate, equity returns along with another challenging year for bonds. While the Omicron variant may have delayed some economic activity, the overall global economy has not been derailed in our view.
Central banks will start to raise interest rates and taper asset purchases this year, but they will do so in a relatively subdued manner. As supply bottlenecks ease, central banks will likely be more tolerant of inflation risks and maintain fairly accommodative monetary policies.
Inflation will most likely settle above pre-pandemic levels, but we do not see hyperinflation as a probable scenario. In 2022, new targeted vaccines along with antiviral treatments will further help the fight against COVID-19 and ease any business and economic restrictions.
Broadly speaking, equity valuations appear somewhat full which will make stock selection increasingly important moving forward. Investors heavily allocated to richly valued, high-growth technology stocks should take caution. Rising bond yields will likely weigh on high-growth, long-duration stocks with low or negative margins.
Generally speaking, higher interest rate yields make the promise of future profits less valuable in present value terms. In Stan Wong Managed Portfolios, we prefer cyclical stocks and have increased our allocation to value stocks. The financial, energy and health care sectors look particularly attractive to us.
From a geographic perspective, we like U.S. equity markets for its breadth and depth of high-quality names but see valuations in international markets as somewhat more attractive. In our fixed income allocation, we are underweight government bonds in favour of inflation-protected bonds and short-duration corporate bonds.
Pfizer (PFE NYSE)
Last bought in January 2022 at $55.00
Pfizer is one of the world’s largest biopharmaceutical companies, with revenue expected to top US$97 billion in 2022. Pfizer develops medicines, vaccines, medical devices and consumer healthcare products for oncology, inflammation, immunology, cardiovascular and other therapeutic areas.
The Company’s pipeline is rapidly improving with several recent successful drug launches. In particular, Pfizer’s cardiovascular drug (Vyndaqel) appears very promising. Of course, Pfizer’s highly successful COVID-19 vaccine (Comirnaty) and upcoming antiviral treatment pill (Paxlovid) should also continue to yield massive cash flow windfalls over the near-term. More shots are likely to be needed for sustained protection against the virus beyond the current third booster dose while the antiviral pill will also certainly be in high demand.
PFE shares trade at a 10x forward price-earnings multiple and yield a 2.8 per cent dividend. Pfizer reports its next quarterly results on February 8th.
Manulife Financial (MFC TSX)
Last bought in January 2022 at $23.00
With $1.4 trillion in assets under management and administration and a market capitalization of over $50 billion, Manulife is one of the world’s largest life insurance companies. Manulife offers annuity, pension, life insurance, health insurance and asset management products operating in North America and Asia.
With Asia representing over 35 per cent of Manulife’s overall revenue, the company stands to benefit long-term from the region’s growing middle class and its demand for life insurance, health insurance and wealth management.
As well, an aging global population is a catalyst for greater demand for MFC’s wealth management offerings. Near-term, rising interest rates should help life insurers such as Manulife. MFC currently trades at about 1.0x price-to-book, a relative discount to its peer group.
The shares pay an attractive 4.3 per cent dividend yield which is expected to grow moderately over the next few years. Manulife reports its next quarterly results on February 9th.
ProShares Equities for Rising Rates ETF (EQRR NASD)
Last bought in January 2022 at $53.00
The ProShares Equities for Rising Rates ETF provides exposure to a basket of U.S. stocks designed to outperform broader U.S. large-cap equity markets during periods of rising U.S. Treasury interest rates.
The ETF targets sectors that have the highest correlations to U.S. 10-year Treasury yields and within those sectors, stocks that have a strong tendency to outperform as rates rise. In 2021, the ProShares Equities for Rising Rates ETF outpaced the S&P 500 Index by over 7 per cent.
With U.S. 10-year Treasury yields expected to climb above 2.0 per cent this year, the EQRR ETF is expected to continue its outperformance. EQRR also trades at a valuation discount relative to the S&P 500 Index. Financials, energy and basic materials constitute 75 per cent of this ETF, providing a largely cyclical exposure for investors.
Top holdings in the ProShares Equities for Rising Rates ETF include Citizens Financial, Bank of America, JPMorgan, Exxon Mobil and Marathon Petroleum.
PAST PICKS: January 13, 2021
Alibaba (BABA NYSE)
- Then: $235.30
- Now: $137.71
- Return: -42%
- Total Return: -42%
Simon Property Group (SPG NYSE)
- Then: $88.87
- Now: $163.24
- Return: 83%
- Total Return: 90%
Wells Fargo (WFC NYSE)
- Then: $33.80
- Now: $56.29
- Return: 67%
- Total Return: 68%
Total Return Average: 39%