Paul Harris, partner and portfolio manager at Harris Douglas Asset Management

FOCUS: North American and global stocks

MARKET OUTLOOK:

I think we are in a period of extended volatility with the Ukraine-Russian crisis and the U.S. Federal Reserve rate increase.

The Ukraine crisis will certainly cause a fair amount of volatility as the situation remains fluid. It does make clear the need for energy security in Europe and the move to green energy has left them open to Russian aggression using gas as a weapon.

It also has solidified a closer relationship between Europe and the U.S., something that had deteriorated during the Trump years.

As the Federal Reserve increases rates and reduces their balance sheet, we should see continued volatility in stocks and bonds until the market gets an understanding on the path forward.

The Fed is in a difficult situation as the yield curve 2-10 is quite flat and inverting which indicates slowing growth already. I have been in the fixed income market long enough to know the yield curve matters as an indicator.

While inflation may remain at elevated levels in 2022, we expect supply chains will adjust over time. We continue to believe as the economy normalizes, we will see lower inflation.

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TOP PICKS:

Walt Disney (DIS NYSE)

The Walt Disney Company, commonly known as Walt Disney or simply Disney, is an American diversified multinational mass media and entertainment conglomerate. The purchase of the Fox assets along with the new streaming services make it one of the best competitors to Netflix. Disney’s film library is by far the best in the industry and spans all age groups.

From its US$60 billion in revenue, 41 per cent comes from parks, 36.5 per cent from media and the remainder is consumer and studio entertainment. Disney is expected to generate US$7 billion in free cash flow (FCF) in 2022. Has high interest coverage and converts 85 per cent of its FCF to net income. Disney+ its new streaming services has grown rapidly and is a real competitor to Netflix. The parks business continues to show momentum as COVID subsides.

Zebra Technologies (ZBRA NASD)

Manufactures and sells marking, tracking and computer printing technologies. Its products include thermal barcode label and receipt printers, RFID smart label printers/encoders/fixed & handheld readers/antennas, and card and kiosk printers that are used for barcode labeling, personal identification and specialty printing principally in the manufacturing supply chain, retail, healthcare and government sectors. Zebra benefits from the further move to e-commerce. The stock trades at 23 times earnings, has substantial earnings potential, strong balance sheet and very strong free cash flow.

Zoetis (ZTS NYSE)

Zoetis is the largest public animal-health company. Zoetis was spun off from Pfizer in 2013. In 2018, U.S. pet owners spent US$15.5 billion on over the counter medicine and supplies and double US$6.2 billion in 2001.

Healthcare for animals has a certain advantage over health for humans. The industry doesn’t have content with pricing pressure from insurance industry as most medical expenses are paid out of pocket.

Developing drugs for pets, compared with for humans, is generally faster and less expensive, since it requires fewer clinical studies involving fewer subjects Most companies try to find compounds that have worked in humans, so we don’t to start from scratch.

Generic drugs are less of a threat. The company has strong free cash flow growth, generating US$2.0 billion in 2022, a strong balance sheet and covers interest on debt 14x and high conversion rates in free cash flow to net income.

PAST PICKS: April 6, 2021

Bank of America (BAC NYSE)

• Then: $39.69
• Now: $39.80
• Return: 0.3%
• Total Return: 2%

Check Point Software Technologies (CHKP NASD)

• Then: $115.15
• Now: $143.50
• Return: 25%
• Total Return: 25%

Stryker (SYK NYSE)

• Then: $248.39
• Now: $276.90
• Return: 12%
• Total Return: 13%

Total Return Average: 13%