Gordon Reid, president and CEO, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

Financial markets are roiled by the possibility of a recession caused by the actions of the Federal Reserve to control inflation. No one has a crystal ball so regardless of your view, understanding that a recession is a possibility must be a consideration in your investment stance.

First, recessions are a part of a normal economic cycle and regardless of how disruptive in the short-term, must be built into our thinking. Secondly, recessions come in different shapes and sizes. Every recession doesn’t come with the ferocity and duration of the 2008 experience. Finally, recessions are not terminal events. New economic expansions are born from recessions and come with exciting opportunities for equity investors.

The number one investment consideration when a possible recession is apparent is quality. In other words, does each holding in my portfolio have the financial strength to withstand a drawdown of revenue and profits? Secondly, which part of the market withstands recessions best? How do valuations stack up against historical norms? Are there secular trends that give you confidence that coming out of a recession your stock will resume a growth trajectory?

The flip side of preparation for a recession is the creation of a risk-on portion of your portfolio. New bull markets historically mark their beginning from the point of “peak” inflation. It can be costly to make assumptions or fall into group think.

Regardless, making binary bets in investing can lead to bad outcomes, so hedge your risk and accept a return that recognizes the risk management portion of an investment plan.

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TOP PICKS:

Chubb (CB NYSE)

Latest purchase June 2022 at $209

Strong pricing trends, healthy underwriting results and constructive cost management are leading to improved financial results at Chubb. On the valuation side, this issue trades at a reasonable 1.3 times book value, not excessive when compared to peers or its own trading history. The kicker here is their bond portfolio, which will benefit due to reinvestment opportunities as rates rise.

Clean Harbors (CLH NYSE)

 Latest Purchase April 2022 at $111

Clean Harbour, the owner of Safety Clean, provides environmental and hazardous waste services throughout North America. The pipeline of business is full as the need for disposal services rises and infrastructure projects ramp up. Price increases are being accepted by CLH’s customer base as inflationary pressures rise, evidenced by a 20 per cent increase in operating margins over the past several years.

Alphabet (GOOGL NASD)

 Latest Purchase June 2022 at $2289

This company is a 20 per cent+ grower, top and bottom line, yet it’s trading at a relatively modest 28 times this year’s earnings. Revenue continues to be driven by their advertising business but look for cloud and their “other bets” businesses to be strong contributors in the future. This is only the beginning. Other revenue sources sprouting from the $20B annual R&D budget are positive wild cards.

PAST PICKS: June 15, 2021

 Bank of America (BAC NYSE)

• Then: $41.39
• Now: $35.80
• Return: -14%
• Total Return: -11%

 Masonite (DOOR NYSE)

• Then: $115.52
• Now: $92.22
• Return: -20%
• Total Return: -20%

 Toll Brothers (TOL NYSE)

• Then: $58.44
• Now: $50.14
• Return: -14%
• Total Return: -13%

 Total Return Average: -15%