Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: Global value stocks and high yield bonds
Top picks: American Express, Bank of Nova Scotia, Diageo
MARKET OUTLOOK:
Recent events suggest that investors had better get used to plenty of volatility over the next few years. That being said, on the economic front, we anticipate that rational minds will eventually prevail, and that policymakers will focus on growth and stability. The rhetoric may remain heated, but politicians understand that trade wars and higher inflation are not winning strategies with voters.
Government stimulus has been a significant contributor to growth over the past decade, but with most developed countries dealing with high debt levels and normalized interest rates, there is less room for fiscal stimulus going forward. That means the economy will be more reliant on private sector investment than in recent years, so the anticipated corporate tax cuts in the U.S. (and possibly in Canada) should provide some benefit.
What does all of this mean for investors? Quality is key. Warren Buffett’s quote that “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price” is especially true today.
Great businesses with strong franchises and free cash flow will be most adept at adapting to this fast-changing environment. Investors need to tune out the daily noise and focus on long-term fundamentals.
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TOP PICKS:
American Express (AXP NYSE)
Founded in 1850, American Express is known principally for its charge cards, but it also extends credit and provides a suite of related services to businesses and merchants. The company is positioned at the higher end of the card business, and despite the competitive nature of the industry, it has generated double-digit earnings growth over the past many years, with significant excess cash generation.
The company has proven to be an outstanding allocator of capital with above-average dividend growth, while reducing its share count almost 40 per cent over the past 20 years. The shares have sold off somewhat recently due to fears of a spending slowdown, but investors should note that the company remained highly profitable during the financial crisis.
Bank of Nova Scotia (BNS TSX)
BNS is Canada’s worst performing bank (by far) over the past decade, lagging behind its peers by virtually every metric. However, a change of leadership in 2023, has resulted in some important strategic changes, and the bank is starting to deliver better results, with further improvement anticipated.
The bank has been reducing its exposure to Latin America - including its recent decision to exit Colombia, Costa Rica, and Panama - in order to focus capital allocation on more profitable areas of operation.
While the operating metrics will continue to lag its peers, the shares are trading at a compelling valuation discount with arguably better earnings growth as margins improve. The six per cent dividend yield is underpinned by improving earnings, and over the next several years the company should be able to significantly narrow its valuation discount.
Diageo (DEO NYSE)
Diageo is the world’s largest spirits producer with such leading brands as Smirnoff vodka, Johnnie Walker whiskey and Guinness. The company has unparalleled distribution and is focused on increasing its exposure to premium brands.
Post-COVID-19, revenues have been flat, and the shares are now trading at a 10-year low. Wall Street has lost some confidence in management, but similarly to Starbucks, if the board determines a change is in order, Diageo can attract the best talent.
The company continues to generate significant free cash flow, which is being allocated to mergers and acquisitions, share buybacks and dividends. At the current price, investors have the opportunity to buy a world-class business at an opportune time, with a cheap valuation and a 3.8 per cent dividend yield.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| AXP | Y | Y | Y |
| BNS | Y | Y | Y |
| DEO | Y | Y | Y |
PAST PICKS: February 01, 2024
Compass Group PLC (CPG LON)
- Then: £2,143.00
- Now: £2,606.00
- Return: 22%
- Total Return: 24%
Nike (NKE NYSE)
- Then: US$101.76
- Now: US$77.98
- Return: -23%
- Total Return: -22%
Starbucks (SBUX NASD)
- Then: US$93.37
- Now: US$106.80
- Return: 14%
- Total Return: 18%
Total Return Average: 7%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CPG LON | Y | Y | Y |
| NKE | Y | Y | Y |
| SBUX | Y | Y | Y |