Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs

MARKET OUTLOOK:

Market volatility has increased considerably in recent weeks with the CBOE Volatility Index (VIX) spiking above critical levels. Geopolitical tensions, rising interest rates and inflationary pressures continue to cause market angst. The S&P 500 Index fell 8.8 per cent in April, it’s worst monthly performance since March 2020. Here in Canada, the TSX slipped 5.2 per cent last month but has faired better than most global equity markets year-to-date with its heavier weighting (over 30 per cent) in energy and materials stocks. Meanwhile the tech-heavy Nasdaq Composite tumbled 13.3 per cent in April, it’s worst monthly performance since October 2008.  

Although the path for equity markets has been treacherous this year, we see opportunity as investor sentiment swings to fear and panic. As always, we encourage investors to heed the old investment aphorism “be fearful when others are greedy and greedy when others are fearful.” Recent chatter about a potential recession in the near-term is rather premature and overstated from our viewpoint. Both the Conference Board U.S. Leading Economic Index (LEI) (comprised of 10 economic indicators) and the U.S. three-month/10-year yield curve do not forecast an economic downturn over the next 12 months. Indeed, U.S. labour data, manufacturing numbers, retail sales and housing data all continue to look encouraging. While economic growth may be somewhat dampened due to the effects of rising interest rates, supply chain pressures and geopolitical conflicts, an economic contraction does not seem probable in our view. The reopening of the global economy should continue to yield powerful economic results and should offset these risks.

In Stan Wong managed portfolios we have tilted our allocation to value stocks and have lowered our weighting in growth stocks. The financial, energy, materials and health care sectors look particularly attractive to us. We remain cautious on the technology sector (and other higher multiple growth areas) given the rising interest rate environment and relative valuations. The S&P 500 Information Technology Index recently traded at a valuation high of 7.8x price-to-sales in December (now at 6.1x price-to-sales). In March 2000, the technology index reached a price-to-sales multiple high of 7.5x before falling 82 per cent over the next 30 months. From a geographic perspective, we like U.S. equity markets for its breadth and depth of high-quality names but see valuations in international markets as somewhat more attractive. In our fixed income allocation, we are underweight government bonds in favour of inflation-protected bonds and short-duration corporate bonds.

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TOP PICKS:

Costco Wholesale (COST NASD)

Last bought this month at ~US$520

With over 114 million members around the world and over US$222 billion in expected revenue for 2022, Costco is a dominant name in the mass merchant space. Costco continues to enjoy tremendously strong loyalty in the U.S. and Canada with membership renewal rates holding steady at 90 per cent. Among mass merchant retailers, Costco is a clear leader in cost leverage, procurement strength and store efficiency – allowing for store traffic to remain exceptionally high. Despite the large size of its warehouses, the Company concentrates its buying power on a relatively small number of items (about 4,000 units in store compared to 140,000 units at Walmart superstores). Amid rising fuel costs and inflationary pressures, Costco’s value proposition continues to grow more attractive for its members. The Company reports its next quarterly results on May 26th.   

CVS Health (CVS NYSE)

Last bought this month at ~US$98

CVS Health is the largest drugstore chain in the U.S. and is a leading pharmacy benefits manager with about 110 million plan members. In 2018, CVS acquired Aetna which has allowed the Company to help patients more holistically, managing both medical and pharmacy benefits and ultimately leading to revenue growth and cost efficiencies. Today, the integrated pharmacy health care provider is forecasted to earn nearly US$308 billion in revenue for 2022. The Company is very shareholder-friendly, announcing a US$10 billion share repurchase program a few months ago. This week, CVS reported earnings that beat analyst expectations and also raised its guidance for the full fiscal year. Remarkably, the company has beaten analyst earnings expectations for the last 25 consecutive quarters. As a large-cap value name, the shares currently trade at 12x forward price-earnings – a discount to its historical median. CVS currently pays a 2.2 per cent dividend yield and reports its next quarterly results on August 4th.

Mosaic (MOS NYSE)

Last bought this month at ~US$62

With over US$20 billion in forecasted 2022 revenue, Mosaic is one of the world’s largest producers of phosphate and potash, which are used for crop nutrition and as input to animal feed. In North America, Mosaic accounts for 75 per cent of annual phosphate production and 35 per cent of potash production. Near-term, geopolitical conflicts and sanctions have resulted in agricultural supply shocks and materially higher fertilizer prices. In this week’s quarterly earnings call, management at Mosaic indicated that they expect phosphate and potash markets to remain tight well beyond 2022. Longer-term, declining arable land per capita globally will force growers to become more productive, thereby pushing further demand growth for crop inputs. Lastly, increasing wealth and changing diets in developing countries such as China and India looking to secure long-term food supply is driving secular demand for potash. Mosaic reports its next quarterly results on August 2nd.

PAST PICKS: May 19, 2021

Alphabet (GOOGL NASD)

• Then: $2,271.50
• Now: $2,320.03
• Return: 0.2%
• Total Return: 0.2%

Booking Holdings (BKNG NASD)

• Then: $2,270.01
• Now: $2,189.19
• Return: -3%
• Total Return: -3%

Mastercard (MA NYSE)

• Then: $360.98
• Now: $357.83
• Return: -1%
• Total Return: -1%

Total Return Average: 3%