Chris Blumas, portfolio manager, Raymond James Investment Counsel

FOCUS: North American large caps 

MARKET OUTLOOK:

It’s been a roller coaster ride for investors so far in 2022. Equity markets sold off at the start of the year and have rebounded somewhat over the last couple of months on the back of positive inflation data. While interest rate hikes are likely to continue, overall tightening by the U.S. Federal Reserve can be less aggressive and the likelihood of a crash landing in the economy appears to have been significantly reduced.

In prior tightening cycles, the Fed has had to push interest rates above the rate of inflation and create positive real interest rates. The central bank has signalled its policy rate would rise to 3.4 per cent by the end of this year. With U.S. inflation running around eight per cent year-over-year, there is a way to go before real rates turn positive. Overall, I think it’s unlikely that this will occur because there is too much debt in the system, and with U.S. debt-to-GDP so elevated, significantly higher interest rates are likely to crowd out crucial public programs and critical defence spending.

While putting investment dollars to work in this uncertain environment can be challenging, equity market valuations have compressed aggressively this year and the valuation risk embedded in the markets is significantly lower. With low nominal interest rates and negative real returns, investors holding cash and low-yielding fixed-income securities risk a loss in purchasing power over time. Overall, I think investors should remain well diversified and defensively positioned and avoid the temptation to exit the markets and wait on the sidelines. 

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TOP PICKS:

Walt Disney (DIS NYSE)

Disney is a global media and entertainment company. The company generates revenues by distributing original content, providing customer experiences at its parks and resorts, also by selling consumer products. Disney shares are down by more than 30 per cent over the past year as structural streaming concerns have negatively affected investor sentiment. During its most recent quarter, Disney+ subscribers hit more than 150 million (up more than 30 per cent year-over-year) and the revenue from its domestic parks and experiences business increased by more than 100 per cent. Increased attendance and guest spending more than offset higher costs and lead to a strong rebound in overall segment operating profits. Going forward, it’s going to take Disney some time to return to its pre-pandemic level of profitability, but its unique assets and digital capabilities enhance its competitive position and create a platform that should help to drive future EPS growth. The shares are currently trading at 23x forward earnings for 2023 and a near 20 per cent discount to a conservative sum-of-the-parts valuation. Disney does not pay a dividend to shareholders.

Chartwell Retirement Residences (CSH.UN TSX)

Chartwell owns and operates retirement residences for seniors. The trust’s main business is its private pay retirement operations which account for around 90 per cent of profits. Demographic trends and fiscal constraints on governments should lead to significant private pay demand over the long-term. So far this year, growth in funds from operations has been weak as the pandemic has reduced occupancy levels and increased expenses. Going forward, occupancy levels are expected to normalize and the trust has a solid development pipeline that should help enhance its growth profile. The trust currently trades at around 15x forward funds from operations and provides investors with a dividend yield of 5.6 per cent.

KKR & Co, Inc. (KKR NYSE)

KKR is an alternative asset manager with a unique business model and a global presence. The company earns a variety of fees (management, transaction, monitoring and performance) from managing third-party capital. KKR has almost $500 billion in assets under management (AUM) and around one-third of this AUM is perpetual in nature. Last year, the company acquired Global Atlantic, one of the largest annuity providers in the U.S., to bolster its permanent capital base and give the firm greater access to a low-cost source of funds. Overall, KKR’s business is scaling very well and the company is expected to continue raising large amounts of capital over the medium term (3-5 years) as institutional investors continue to shift more of their assets into higher-yielding asset classes with less apparent volatility. The shares currently trade at around 14x current year distributable earnings and have a dividend yield of more than one per cent.

PAST PICKS: October 12, 2021

Enghouse Systems (ENGH TSX)

• Then: $54.76
• Now: $32.81
• Return: -40%
• Total Return: -39%

Raytheon Technologies (RTX NYSE)

• Then: $89.72
• Now: $94.12
• Return: 5%
• Total Return: 7%

Great-West Lifeco (GWO TSX)

• Then: $38.81
• Now: $32.63
• Return: -16%
• Total Return: -12%

Total Return Average: -15%