Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

The high level of inflation has lasted longer than anticipated, resulting in aggressive rate hikes by the Federal Reserve. The war in Ukraine has put added pressure on commodity prices, while supply chain issues and labour shortages persist. There are already signs that the rate increases are having an impact, as the housing market has started to cool off.

It is worth noting that it usually takes about nine months for the economy to experience the full impact of rate changes. That is why there is increasing concern by investors that the Fed may “overshoot” by raising rates too aggressively, which could result in a recession.

Rising yields, the war in Ukraine and fear of recession have caused markets to sell off, and opportunities abound. As we look forward over the next twelve months, the war in Ukraine will probably be over (possibly to no one’s satisfaction), supply chain problems will subside and the inflation rate should be significantly lower than today.

Fear and uncertainty always result in opportunity for long-term investors and today’s situation is no exception. In the present market, investors can buy some of the world’s great businesses on sale, which should result in substantial wealth creation over the next many years.  

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

AMAZON (AMZN NASD)

The technology sector has suffered more than most, as rising yields have caused valuation multiples to compress. Amazon’s revenues will exceed $500 billion this year, as it continues to expand into new businesses, usually with flawless execution. It has funded this growth through its cash generation and we expect earnings and free cash flow growth to accelerate over the next several years. The recent decline in the share price gives investors the opportunity to buy this great company with a margin of safety and significant upside.

MORGAN STANLEY (MS NYSE)

Bank stocks have been another victim of the recent market decline and Morgan Stanley is no exception. This company is the largest wealth manager in the U.S. and has reduced its exposure to more cyclical businesses such as trading and investment banking. The company has been exceptionally well managed, as evidenced by its growth and profitability since the financial crisis. The shares currently trade at a P/E of 10, with a 3.8 per cent dividend yield, a truly compelling value.

BERKSHIRE HATHAWAY (BRK.B NYSE)

Berkshire Hathaway shares are lower today than one year ago, offering investors a truly unique opportunity. The company is the largest shareholder of Apple, whose shares are down with the tech market. Berkshire is also a major insurance company through its ownership of GEICO and other insurance businesses. Of course, it also has a significant portfolio of private and public companies which have created exceptional value over many years. Despite criticism for sitting on a large cash position, the company is now perfectly positioned to deploy its cash at opportunistic prices, as it has done successfully in the past.  While Buffett and Munger are now in their 90s, they have hired capable successors to run this company while sticking to its core principles.

PAST PICKS: June 28, 2021

Compass Group (CPG LON)

• Then: 1509.00 GBp
• Now: 1695.00 GBp
• Return: 12%
• Total Return: 14%

Corning (GLW NYSE)

• Then: $40.99
• Now: $32.27
• Return: -21%
• Total Return: -19%

Taiwan Semiconductor (TSM NYSE)

• Then: $119.61
• Now: $87.62
• Return: -27%
• Total Return: -25%

 Total Return Average: -10%