Brett Girard, chief financial officer and portfolio manager, Liberty International Investment Management
FOCUS: Global stocks
It is likely the market will continue to struggle for direction as we head into year-end. Inflation appears to be peaking, but between six and eight per cent year-over-year we are still in the throes of it. On the jobs front, despite the widespread layoffs throughout the tech sector, employment remains stubbornly strong (3.5 per cent unemployment, 10 million open jobs). To top it off, we have an emboldened US Federal Reserve that continues to indicate financial conditions are too loose and interest rates are going higher.
The silver lining with higher interest rates might be disproving the notion that equities are the only viable asset class. Interest-bearing securities, especially with durations beyond 2024, look attractive for income seekers. Within equities, investors should consider defensible business models and the ability to generate free cash flow. Companies strong in these attributes, especially those with a clean balance sheet, can be nimble in a changing macroeconomic environment and reward shareholders with rising dividends.
As and when the Fed declares interest rates to be sufficiently high, we could very well have a market with lower equity valuations and material fixed income yield, resulting in the “tired” 60 per cent equity and 40 per cent fixed income portfolio having another strong decade.
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Brookfield Asset Management (BAM.A TSX)
In its latest effort to realize shareholder value, the asset management side of the business will be spun off from the corporate balance sheet investments (to trade at BN). The goal is to unlock some of the discount being applied to the smoother fee-related earnings from the lumpy investment income. Buying ahead of the spin-off will allow investors the choice to keep one or both new entities after potential market repricing.
Alimentation Couche-Tard (ATD TSX)
Over the past five years, cash flow from operations has grown by 15.4 per cent and dividends have grown at 22 per cent. Maintaining mergers and acquisition discipline for the past three years should pay off as target valuations are falling with private equity sponsors leaving the space. Fresh fast food private label offerings stand to benefit from consumers feeling the pinch of inflation substituting down on food selections.
Reckitt Benckiser (RKT LON)
Consumer staple stalwart with brands like Lysol, Enfamil and Durex. Turned corner after significant Mead Johnson write-down during COVID and now focused on organic growth. In the first half of 2022, revenue was up 8.6 per cent, operating margin 290 bps higher and free cash flow up 40 per cent, while the e-commerce channel grew 19 per cent year-over-year. Using a stronger Canadian dollar to buy a weaker GBP-based name also leverages potential FX gains if currencies normalize going forward.
PAST PICKS: November 8, 2021
Unilever (UL NYSE)
- Then: $52.81
- Now: $48.85
- return: -7%
- Total Return: -4%
Danaher (DHR NYSE)
- Then: $301.35
- Now: $261.58
- return: -13%
- Total Return: -13%
Globus Medical (GMED NYSE)
- Then: $77.53
- Now: $69.01
- return: -11%
- Total Return: -11%
Total Return Average: -9%