David Baskin, chairman and president, Baskin Wealth Management

FOCUS: North American large caps

MARKET OUTLOOK:

The three major forces that have battered the market in the first half of the year, COVID-19, inflation and the war in Ukraine, continue to be significant factors. However, the supply chain problems and sharp increases in the prices of key commodities caused by the COVID-19 pandemic appear to be easing. We have seen prices for gasoline, wheat, corn, oil and copper all fall quickly in the past few weeks. This bodes well for consumer inflation and this in turn probably means that the main central banks, including the U.S. Federal Reserve, will stop raising interest rates in the next few months. Sadly, the war in Ukraine shows no signs of coming to an end. This is a wild-card factor that has the ability to affect everything, including the security of former states of the USSR, the prices of key commodities such as wheat and oil, and the ability of a number of countries including Russia to service their external debt.

The most important thing for us has been the earnings reports for the second quarter. Stock prices are mostly driven by corporate profits and we are pleased to see that most companies are doing as well or better than expected. While we do expect to see some multiple contractions in the face of higher interest rates, it is clear that the market has overly discounted the profit potential of many major companies, giving rise to some buying opportunities. 

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TOP PICKS:

Amazon.com (AMZN NASD)

Amazon shares have sold off over concerns about slowing growth and overexpansion in the last two years but we think Amazon is very well positioned for several mega-trends including e-commerce, digital advertising and cloud services. Having just doubled its fulfillment capacity in the last few years, we believe Amazon will ease up on capital expenditure, leading to strong profitability going forward. Furthermore, Amazon Web Services continues to be the leader in the fast-growing cloud computing industry.

Costco (COST NASD)

Costco benefited as an essential retailer during COVID-19, and we think Costco is well-positioned to gain market share in an inflationary period as the lowest-cost seller of high-quality goods. As Costco grows, its negotiating scale and buying power increases, further improving the value proposition of membership. Longer-term, we think Costco has a long runway to open stores in international markets and grow the e-commerce business.

TD Bank (TD TSX)

We think Canadian bank stocks are attractive despite fears of a housing slowdown and a recession. Canadian banks have been very prudent in underwriting mortgages over the last decade with low LTVs in the 50s and large insured portfolios. Consumer balance sheets and employment figures remain strong, which should provide a buffer in a downturn. Furthermore over half of TD’s assets are actually in the U.S., which in our view has fewer housing-related risks. With shares at 9x earnings and 1.5x book value, we think shares are attractive.

PAST PICKS: January 25, 2022

Netflix (NFLX NASD)

• Then: $366.42
• Now: $229.19
• Return: -37%
• Total Return: -37%

Canadian Apartment REIT (CAR.UN TSX)

• Then: $54.14
• Now: $47.51
• Return: -12%
• Total Return: -11%

JPMorgan (JPM NYSE)

• Then: $146.53
• Now: $115.05
• Return: -21%
• Total Return: -20%

Total Return Average: -23%