Chris Blumas, portfolio manager, Raymond James Investment Counsel

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

It’s been a rough start to 2022 for investors as equity markets around the world have sold off. Recession fears continue to dominate the headlines and while the timing of the next recession remains unclear, all eyes are on the U.S. Federal Reserve as it tries to combat high inflation and engineer a soft landing for the U.S. economy.

Inflation pressures were expected to be moderate this year but Russia’s invasion of Ukraine and further lockdowns in China have created additional supply chain pressures that have continued to push inflation higher. Against this economic backdrop, the Federal Reserve has initiated an aggressive and abrupt monetary policy “U-turn” and has started to raise interest rates and shrink its balance sheet. As liquidity is removed from the financial system, the more speculative pockets of financial markets could be vulnerable to further correction. Companies with weak earning and/or cash flow risk losing access to the capital markets and could see their share prices continue to erode.

While putting investment dollars to work in this uncertain environment can be challenging, income-oriented equities and growth-oriented equities with strong fundamentals look like an attractive outlet for investors. Equity market valuations have compressed aggressively this year and the valuation risks embedded in markets are 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, defensively positioned and avoid the temptation to exit the markets and wait on the sidelines. 

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TOP PICKS:

Artis REIT (AX.UN TSX)

Most recent purchase at $12.16 on 2022-05-11

Artis is a diversified REIT with a mix of office, industrial and retail properties. The trust currently generates around half of its operating income in Canada and half in the U.S. Diversified REITs are out of favour and trade at dramatically lower valuations than other real estate subsectors. During the first quarter of 2021, Artis reconfigured its board and appointed a new CEO with the aim of improving capital allocation and maximizing value for unitholders. The end goal of the new management team is to create an asset management platform with the optionality to invest in public and private real estate markets on a value basis and grow NAV at an above-average rate. The units currently trade at 9x current year funds from operations and have a distribution yield of almost 5 per cent. At Q1 2022, the IFRS NAV per unit was around $19 and the current discount to NAV of 35 per cent is among the largest discounts in the Canadian real estate universe.

CGI Inc. (GIB.A TSX)

Most recent purchase at $103.08 on 2022-05-04

CGI is an IT outsourcing and consulting company and its revenues are split almost evenly between these service offerings. The company has clients around the world and a strong competitive position in North America and Europe. As companies look to boost their efficiency and transition to a more digital world, CGI’s service offerings and global delivery model lead to enduring client relationships and a high level of recurring revenues. Going forward, the CGI is well-positioned to benefit from industry consolidation and has the financial flexibility to create value through acquisitions, organic initiatives and share buybacks. The shares are currently trading at 16x current year earnings and have a trailing free cash flow yield of more than 7 per cent. CGI does not pay a dividend to shareholders.

Walt Disney (DIS NYSE)

Most recent purchase at $107.91 on 2022-05-27

Disney is a global media and entertainment company. The company generates revenues by distributing original content, providing customer experiences at its parks and resorts and by selling consumer products. Disney shares are down by almost 50 per cent over the past year as structural streaming concerns have negatively affected investor sentiment. During its most recent quarter, Disney+ subscribers hit 130 million (up 37 per cent year-over-year) and the revenue from its parks, experiences and products segment reached an all-time high as visitors returned to its attractions and per capita spending exploded (up 40 per cent year-over-year). 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 currently trading at 17x forward earnings for 2023 and a 30-40 per cent discount to a conservative sum-of-the-parts valuation. Disney does not pay a dividend to shareholders.

PAST PICKS: August 17, 2021

Alimentation Couche-Tard (ATD TSX)

• Then: $52.10
• Now: $54.52
• Return: 5%
• Total Return: 5%

KKR & Co. (KKR NYSE)

• Then: $63.52
• Now: $48.45
• Return: -24%
• Total Return: -23%

Yum China (YUMC NYSE)

• Then: $60.28
• Now: $40.90
• Return: -32%
• Total Return: -31%

Total Return Average: -16%