Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks, high-yield bonds 

MARKET OUTLOOK:

Market sentiment remains focused on inflation and the possibility of interest rate cuts, especially in the U.S.  While inflation has moderated, the data remains mixed, and the U.S. Federal Reserve has made it clear that it won’t cut rates until it is convinced that inflation is under control. However, despite the persistently high rates, corporate profits remain healthy and the economy has thus far avoided a recession.

Over the past few years, investors have been living in a “tale of two markets,” as large-cap technology stocks have dominated the indices while most everything else has been ignored.  There is no question that companies such as Nvidia, Microsoft, Meta, Alphabet and the like are generating significant profit growth while maintaining robust profit margins and free cash flow. However valuations for this sector have risen significantly, and many of these stocks are now priced for perfection.

The result is that while market indices may be trading near all-time highs, there are so many great businesses whose share prices have remained stagnant, and which offer outstanding value to investors.

When markets are dominated by one sector, diversification becomes a dirty word, and everyone wants to ride the momentum.  However, investors would be wise to remember the lessons of every past cycle: “Nothing stays expensive forever and nothing stays cheap forever.”  

Now is the time to be building positions in the many great companies whose share prices have lagged, while reducing exposure to those equities which may no longer represent good value.

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TOP PICKS:

The Walt Disney Company (DIS NYSE)

The decline in the price of Disney shares over the past few years offers an excellent entry point for this unique company. After management changes and significant restructuring, the company has returned to profitable growth, with improvement in all divisions, most notably in streaming. 

Streaming should reach break-even this year, and be a growth driver in the years ahead, while theme parks remain the most profitable part of the business.  ESPN remains solidly profitable, and the company is focused on transitioning this business with a greater focus on streaming.

We expect annual earnings growth of 20 per cent this year and next, and a return to dividend growth and share buybacks. 

Cisco Systems (CSCO NASD)

Cisco is the global leader in networking systems and has evolved its product suite over the past few years to encompass network security and cloud-based solutions. The recent acquisition of Splunk should lead to accelerated growth in Security, Cloud and AI-related software and services. The product mix continues to shift toward higher-margin software and services, and after several years of minimal growth, revenues are on the upswing.

The company has always been a free cash flow machine and has allocated excess cash toward share buybacks, dividend increases and strategic acquisitions. At the current share price, the 3.4 per cent dividend yield, with a P/E of 13, offers truly compelling value. 

Yamaha Corporation (7951 TYO)

Yamaha is the global leader in musical instruments, as well as a significant presence in audio equipment. The share price declined over the past couple of years due to slowing sales in China accompanied by weaker margins, but the picture is improving.

The company is in very strong financial shape, with no net debt, and has used its free cash flow to buy back shares.

We expect earnings and margins to rebound sharply over the next few years, and investors today have the opportunity to buy this excellent company at a cheap price.