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

FOCUS: North American and global stocks 

MARKET OUTLOOK:

The U.S. Federal Reserve and other central banks reiterated that the priority remained the fight against inflation rather than the support of economic growth. On the inflation front, inflationary pressures moderated somewhat over the last few months. Nevertheless, core inflation generally remains well above central bank targets in most countries, which is why markets are pricing in further rate increases in the coming months.

On a positive note, equity market valuations have now generally fallen. For example, in the U.S., the market is currently trading on a price-to-earnings (P/E) ratio of 15.6 versus a long-term average of 16.6. However, these valuations are based on current consensus analyst forecasts for earnings growth, which have barely fallen. From Dec. 31, 2021, to Sept. 30, 2022, consensus earnings have decreased by less than five per cent. Overall, while the growth outlook remains challenging, many stocks and bonds are now already priced in a relatively high probability of at least a moderate recession. Government bonds are now also pricing in a significant amount of further tightening. So, after a very difficult year thus far, both stock and bond valuations now look more attractive. 

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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 a reduction in headcount and technology. The company continues to improve its capital base with a tier one ratio at 12 per cent. The stock trades at 1.2 times book value and 10 times earnings. The company has a yield of 2.4 per cent. We think the 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. Trades at 27.5x next year’s earnings and yields 0.60 per cent.

Visa (V NYSE)

Visa is like a toll both when you use the card Visa gets .15 basis points per transaction. It processes over 65,000 transactions per second. Today 17 trillion in consumer transactions still use cash and has good organic growth internationally. Visa still has growth in the business-to-business market, especially with loyalty programs. We think we will see an acceleration in revenue growth into the teens driven by:

1. An improving macro backdrop
2. Successful competitive changes around pricing 
3. Faster-than-anticipated consumer payment innovations such as mobile payments  

Visa offers long-term secular-driven stocks especially benefiting from COVID as more people use less cash, and should provide solid organic growth with opportunities for margin expansion. Visa is expected to generate 18. billion in free cash flow in 2023. 

PAST PICKS: November 2, 2021

Stryker (SYK NYSE)

• Then: $272.65
• Now: $218.24
• Return: -20%
• Total Return: -19%

Walt Disney (DIS NYSE)

• Then: $169.83
• Now: $91.22
• Return: -46%
• Total Return: -46%

Alphabet (GOOGL NASD)

• Then: $2908.65
• Now: $97.43 (After 20-for-1 stock split on July 18)
• Return: -33%
• Total Return: -33%

Total Return Average: -33%