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

FOCUS: North American and global stocks

MARKET OUTLOOK:

The bear market so far has all been mostly multiple contractions. The S&P 500 P/E has gone from 24 to16 but EPS and forward EPS have not changed.

In the stock market, two key factors drive share prices over time, the expectations for corporate earnings and interest rates. Today, investors are concerned about the prospect of lower corporate earnings, due largely to a combination of rising costs and the potential for declining demand. Interest rates determine how the cash flow of all types of assets is valued. Today’s rising interest rate environment means that the valuations being applied to the expected future earnings of companies are declining. The risk premium contracted from 2009 until 2021 and the unexpected inflation, and the increases in interest rates, have caused the risk premiums to widen, as a result risk assets are being repriced. 

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TOP PICKS:

Bank of America (BAC NYSE)

Bank of America is one of the largest banks in the United States holding 10 per cent of all deposits in the country. The bank continues to reduce costs through reductions in headcount and technology. The company continues to improve its capital base with a tier one ratio of 12 per cent. The stock trades at one times book value and 10 times earnings. The company yields 2.7 per cent. We think it has an intrinsic value of $50 dollars and will be buying back shares.

FirstService (FSV TSX)

The company focuses on residential property management and services (California Closets). It has room to grow market share in the U.S. in what remains a very fragmented business. The company has grown through acquisitions and organic growth. It trades at 27.5x next year’s earnings and yields 0.60 per cent.

Toronto-Dominion Bank (TD TSX)

Canada’s second-largest bank. TD has developed a strong franchise in the U.S.  The stock trades at 1.4 book value, 10 times 2021 earnings, and has a 4.5 per cent dividend yield.

PAST PICKS: July 22, 2021

EssilorLuxottica ADR (ESLOY OTC)

• Then: $90.46
• Now: $79.04
• Return: -13%
• Total Return: -11%

Check Point Software (CHKP NASD)

• Then: $124.98
• Now: $128.39
• Return: 3%
• Total Return: 3%

Meta Platforms (META NASD)

• Then: $351.19
• Now: $168.95
• Return: -52%
• Total Return: -52%

Total Return Average: -20%