Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs

MARKET OUTLOOK:

After a grueling September, equity markets have bounced higher with the S&P 500 Index higher by over seven per cent thus far in October. From our perspective at The Stan Wong Group, we see market headwinds shifting to tailwinds as inflation data hits an inflection point. Prices for a wide range of commodities including oil, natural gas, gasoline, copper and wheat have retreated sharply from their highs earlier this year. Housing and used vehicle costs also appear to have peaked. Consequently, easing inflation pressures will allow central banks to take a more dovish tone in the coming months and quarters. In general, we remind investors that the greatest opportunities are found during the most uncomfortable and unsettling times. Undeniably, bear markets represent periods of tremendous opportunity for prudent investors able to look beyond near-term uncertainties.

From a fundamental view, the S&P 500 Index is now trading at a meaningful discount to its 10-year historical average, particularly when we look at the S&P 500 Equal Weight Index which carries a much lower weighting in the more expensive technology and communication sectors. From a technical analysis viewpoint, recent bullish divergence signals seem to indicate the end of the downtrend. Interestingly, we note that since 1950, more bear markets have ended in October (over 35 per cent) than in any other month. Upcoming seasonality trends could further help equities. Historically since 1950, we note that the S&P 500 Index has never produced a negative one-year return following the U.S. midterm elections. In fact, the average one-year gain following midterm elections has been 14.7 per cent.

In Stan Wong Managed Portfolios, we continue to favour value stocks above growth stocks. The energy, health-care and financial sectors look most attractive to us. We are underweight in the technology and communications sectors. From a geographic perspective, we prefer U.S. and Canadian equity markets over European and Asian equity markets. The energy crisis in Europe and sluggish growth in China discourage us from these regions. In our fixed income allocation, we like inflation-protected bonds and short-duration corporate bonds but have also added some duration with government and investment-grade corporate bonds. 

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TOP PICKS:

EXXON MOBIL (XOM NYSE)

Last bought in September at ~US$84

Exxon Mobil is one of the world’s largest energy companies and is forecasted to gross over US$409 billion in revenue IN 2022. Exxon’s immense portfolio holds more than 18 billion barrels of oil equivalent of proven reserves across 15 countries. The company’s downstream operations represent nearly 80 per cent of Exxon’s total sales. Its free cash flow yield of over 11 per cent remains very attractive. Like many large-cap energy companies, Exxon Mobil has been focused on returning excess cash to shareholders and keeping capital expenditures and production increases in check. Earlier this year, Exxon’s management announced a tripling of its share buyback program to US$30 billion. Broadly speaking, energy prices are expected to remain firm over the coming years given steady global demand, low inventories, and industry-wide underinvestment. Exxon Mobil currently pays an attractive 3.3 per cent dividend yield and reports its next quarterly results on Oct. 28.

STARBUCKS (SBUX NASD)

Last bought this month at ~US$83

Starbucks is one of the world’s most widely recognized restaurant brands, operating nearly 35,000 stores across 80 countries. With over US$32 billion in expected revenues this year, Starbucks operates in three segments; North America, international markets and channel development (grocery and ready-to-drink beverages). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to license partners, ready-to-drink beverages, packaged coffee and single-serve products. Over the next few years, management aims to return US$20 billion to shareholders in the form of dividend increases and share buybacks. Starbucks’ management also recently provided forward guidance of strong sales and earnings-per-share growth ahead. Longer-term, SBUX will benefit from its leading market share in China and exposure to the country’s growing middle class. The shares are down 33 per cent from last year’s highs and provide an attractive entry point. SBUX shares currently yield a 2.5 per cent dividend which is expected to grow over the next several years. The company reports its next quarterly results on Nov. 3.

WALT DISNEY (DIS NYSE)

Last bought this month at ~US$103

With over US$84 billion in expected revenues this year, Walt Disney is one of the world’s largest and most recognized media and entertainment companies. Disney is quickly gaining market share in its direct-to-consumer streaming segment. Its combined streaming subscriber count, when combining Disney+, Hulu and ESPN+ is now over 221 million subscribers, rivalling Netflix. Disney’s parks and resorts segment is expected to rebound strongly from the pandemic lockdowns as pent-up travel demand intensifies. Lastly, the studio segment’s future looks strong with a strong slate of content ahead. DIS shares are down 50 per cent from last year’s highs, providing compelling value for shrewd investors. The company reports its next quarterly results on Nov. 8.

PAST PICKS: October 21, 2021

META (META NASD)

• Then: $341.88
• Now: $131.98
• Return: -61%
• Total Return: -61%

Merck & Co (MRK NYSE)

• Then: $81.17
• Now: $98.29
• Return: 21%
• Total Return: 25%

iShares Global Financials ETF (IXG NYSEARCA)

• Then: $88.95
• Now: $66.30
• Return: -20%
• Total Return: -17%

Total Return Average: -18%