Lorne Steinberg, president of Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

At present, market volatility is being driven mainly by investor sentiment regarding interest rate cuts. We are in a “bad news is good news; good news is bad news” market. News of weak jobs growth or a slowing economy brings cheers from investors in the hope that the U.S. Federal Reserve will cut rates, while more positive data dims the outlook for lower rates. At the same time, it has become clear that higher rates, as well as higher energy prices, are taking a toll on consumer spending as evidenced by recent corporate earnings reports.

The reality is that wage growth has lagged behind the cost of living, and consumers are feeling the pinch. Both the Fed and the Bank of Canada have been very cautious in their outlooks, not wanting to promise lower rates any time soon. However, with slowing growth in major economies such as China and Europe, we do anticipate at least some rate relief this year, which would help consumers, and boost markets. While market indices are at or near all-time highs, the valuations of many individual stocks are actually quite cheap, and there are plenty of opportunities for patient investors, especially among those sectors that have lagged over the past couple of years.

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Top Picks:

Smith & Nephew ADR (SNN NYSE)

Smith & Nephew is a global medical device company, specializing in hip and knee replacement products, as well as a number of related products used by orthopedic surgeons. The demand for these products is growing strongly, due to the aging population. The onset of COVID-19 resulted in the postponement of many elective surgeries, and medical device companies were negatively impacted. Supply chain issues were also a factor. Post-COVID-19, there remains a significant backlog of patients waiting for their operations.

Revenues grew modestly in 2023, but growth should accelerate going forward, and margins should improve as well, providing a significant boost to earnings. These shares are trading at a historically low valuation with a price-to-earnings ratio of 14 and offer a three per cent dividend yield. Investors have the opportunity to buy a great company in a secular growth industry at a compelling price.

Taiwan Semiconductor ADR (TSM NYSE)

Taiwan Semiconductor Manufacturing Company (TSMC) is the preeminent microchip manufacturer in the world today, acting as the contract manufacturer for some of the largest companies in the industry. The industry is an oligopoly, with only three large players, and TSMC is the best in the business. There is increasing demand for chips as technology becomes more integrated into products such as autos. Also, the adoption of AI is driving demand for the most highly technical chips, and TSMC remains far ahead of its competitors in this area. The company is currently undergoing a major expansion, including a new facility in the U.S., and revenues and earnings are poised to rise sharply over the next few years. For a growth company, these shares offer excellent value.

 Universal Music Group N.V. (UMG – Euronext Amsterdam)

UMG is the global leader in music – both recorded and publishing with more than 50 labels. It is home to many of the greatest-selling artists of all time (The Beatles, Rolling Stones, U2, Lady Gaga, to name a few). Streaming and subscription services now account for the vast majority of revenues. There are only three major companies of size and UMG is 50 per cent larger than the next largest competitor. The company recently settled its dispute with TikTok, which should result in some incremental revenue growth and future opportunities.

 This business has healthy profit margins and strong growth, which should translate into rising profits and free cash flow for years to come. The shift to streaming has increased the monetization of music, and UMG is the major beneficiary. A number of well-known artists have recently sold their catalogues at hefty valuations which gives some idea of the underlying value of this unique business. We anticipate double-digit earnings growth for years to come, which should result in substantial share price appreciation.