Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high yield bonds

MARKET OUTLOOK:

Over the past few months, virtually every asset class has declined, including stocks, bonds and real estate. The war in Ukraine has added to inflationary pressures and supply chain issues, while central banks have been aggressively raising interest rates in an attempt to stabilize price levels. All of this has led to fears of an impending recession.

At times like these, many investors panic because of the volatility and forget about the strength of the companies that they have invested in, also the fact that these businesses have survived through much more perilous times.

Over the past hundred-plus years, investors have experienced two world wars, the 1930s depression, various recessions, high inflation rates in the 1980s and the financial crisis. Following each of these events, the global economy always emerged stronger, while corporate profits and share prices reached new highs.

Looking forward over the next 12-18 months, we would expect that the war in Ukraine will have come to an end (possibly to no one's satisfaction), supply chain issues will abate and new challenges will emerge to dominate the headlines.

In this environment, shares of many truly great companies have fallen along with everything else. Times like these always present the best opportunities for above-average returns.  

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TOP PICKS:

Allstate (ALL NYSE)

Allstate is an exceptionally well-run property and casualty insurer, as evidenced by its enviable track record of free cash flow generation. This company is a model of value creation, as it has bought back over half of its shares over the past fifteen years while growing its market share and raising dividends. 

The insurance sector will benefit from higher bond yields and the company is raising premiums in response to the inflationary environment, both of which should boost earnings over the next several years.

At the current price, the shares trade at a P/E of nine with a three per cent dividend yield, offering significant upside with a comfortable margin of safety.

 American Express (AXP NYSE)

 Founded in 1850, American Express is known principally for its charge cards but also extends credit and provides a suite of related services to businesses and merchants. The company is positioned at the higher end of the card business. Despite the competitive nature of the industry, it has averaged about 10 per cent EPS growth over the past many years, through above-average revenue growth and ongoing share buybacks. 

 The shares have declined because of recession fears and at the current valuation, they offer compelling value.

CVS Health (CVS NYSE)

CVS is arguably the best-positioned company in the U.S. healthcare delivery industry. U.S. reimbursement models are evolving to value-based care and the company is leveraging its medical, pharmacy and lab data to deliver a lower-cost, more effective model. Pharmacies can provide cheaper delivery of a number of services including administering the COVID-19 vaccine, which will help drive growth.

CVS is using free cash flow to reduce debt while maintaining a healthy dividend. At a P/E of 11, these shares offer compelling value.