Barry Schwartz, chief investment officer and portfolio manager, Baskin Wealth Management

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

Baskin Wealth Management prefers to focus simply on owning high-quality businesses rather than attempting to time interest-rate-related swings, as business quality and earnings growth are ultimately what drives the stock price in the long term.

Stock price movements often drive the narrative and investors are now questioning the competitive position of many of these firms, but the simple reality is that for high-multiple, high-growth stocks, a small change in interest rates can have a significant impact on the value of the stock price. Add to the fact that many of these firms are also seeing slowing growth due to COVID-reopening and supply chain issues, and the sharp drop in share prices are not surprising.

Although we certainly have no idea when the stock market or sector performance will turn, there are encouraging signs. Shares of some former high-flyers rallied significantly after earnings despite weak financial results and a disappointing outlook, suggesting that sentiment is improving. Valuations for many growth stocks are now at all-time lows and trading at lower multiples than low-growth consumer staples and utility stocks. Google, which is growing revenues at 15-20 per cent per year, is trading at a lower P/E ratio than Colgate-Palmolive, which should grow sales at 2-3 per cent at best.

Although the recent drawdown is painful, we do not want to compound the mistake by changing our investment strategy and selling our high-quality companies when they are out of favour. Paying up for defensive stocks now by selling cheap growth companies would be akin to selling low and buying high: exactly the opposite behaviour that an investor should have.

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TOP PICKS:

Adobe (ADBE NASD)

Adobe’s creative software business (2/3 of sales and essentially all of profits) is one of the best businesses in the world as a high-margin, sticky, recurring revenue business that benefits from the secular tailwind of growth in digital consumption and creative jobs. After a decade of mergers and acquisitions to build up their enterprise data business, Adobe has communicated to investors that the focus going forward will be on margin expansion and share buybacks. With shares trading at 25x earnings, this is a fair price for a fast-growing business.  

Visa (V NYSE)

Visa is one of the best companies to benefit from the reopening of travel as well as higher inflation. We expect cross-border transactions to return to pre-pandemic levels this year and that should increase Visa’s profits significantly. At the same time, the company is undoubtedly well-positioned to benefit from the secular tailwind of digital commerce. Visa and its counterpart, MasterCard, act as toll roads for consumer and business spending. As prices increase around the world, credit card networks stand to reap the rewards.

National Bank (NA TSX)

We were dazzled by National’s most recent results. The company reported the highest revenue growth of any of its peers at nine per cent in the second quarter and its credit losses were immaterial. We believe the shares are very attractive at less than 10 times forward earnings and offers investors close to a four per cent dividend yield.