Lorne Steinberg, president Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

There has not been a lot of positive news thus far in 2023. The war in Ukraine is in its eighteenth month with no end in sight, while tensions between China and the West remain elevated. At the same time, inflation has proven to be more resilient than forecast, resulting in ongoing interest rate increases. Yet despite all of this, the economy is growing and corporate profits have held up rather well.

There may be one or two more rate increases yet to come, but valuations have adjusted to the new reality, while consumer spending is proving surprisingly resilient. The economy may indeed slow down as the full impact of higher rates kicks in, but we would anticipate that if there is a recession, it will be a mild one.

The run-up in share prices this year implies that value is a bit harder to find, but the gains thus far have been concentrated amongst a narrow segment of the market.

In fact, performance this year has been dominated by the internet and technology sectors, while many other great businesses have been largely ignored. As is usually the case, the best values are usually found in those companies that have been overlooked, and this time is no different. Sectors such as healthcare and financials have lagged behind the broader market, and there are some exceptional opportunities to be found.

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TOP PICKS:

Becton Dickinson and Co. (BDX NYSE)

BDX is a global medical technology company, manufacturing a broad range of supplies, devices and lab equipment (syringes, catheters, drug-dispensing systems) sold to hospitals, physicians and pharma companies. The company has about a 25 per cent share of its addressable market and spends about six per cent of its revenues on research and development to maintain its leading position. About 90 per cent of sales are recurring, as many of its products are disposables.

BDX has used some of its free cash flow to acquire related businesses and has an excellent track record in this regard. The shares were negatively impacted by a product recall, but this has been fully resolved and the new version of this product should boost revenues going forward.

Besides acquisitions, free cash flow has been the source of steady dividend increases and share buybacks, and at the current price, these shares offer excellent long-term value.

Corteva (CTVA NYSE)

Corteva is an agricultural company operating in two segments, seeds and crop protection. This company has flourished since it was spun out of DowDuPont, enhancing its product line, growing sales and earnings and maintaining a pristine balance sheet with minimal debt. It has been using free cash flow to reduce the share count and pay dividends, and it has the financial capacity to make a significant acquisition if the opportunity arises. 

We anticipate annual earnings growth of over 10 per cent for the next several years, which makes these shares a compelling purchase at the current valuation.

Johnson & Johnson (JNJ NYSE)

JNJ is best known to investors for its consumer products (baby shampoo, Aveeno, Neutrogena), but this division accounts for only 16 per cent of sales. Pharmaceuticals account for over half of revenues, with medical devices (such as artificial hips and knees) making up the balance. The company has been dealing with legal issues relating to its talcum powder products, but adequate reserves have been taken to deal with this. The company recently spun off its consumer products business (Kenvue) into a new public company in which it retains a 90 per cent stake, but it intends to divest most of the balance. JNJ is one of only two companies in the S&P 500 with a AAA credit rating, and it boasts a track record of raising its dividend annually over the past sixty years. Trading at a P/E of 16, the shares offer attractive value for a world-class business.

PAST PICKS: May 11, 2022

Cisco Systems (CSCO NASD)

• Then: US$48.65
• Now: US$52.81
• Return: 9%
• Total Return: 13%

Goldman Sachs (GS NYSE)

• Then: US$301.55
• Now: US$356.08
• Return: 18%
• Total Return: 22%

Unilever PLC (UL NYSE)

• Then: US$44.72
• Now: US$52.04
• Return: 16%
• Total Return: 23%

Total Return Average: 19%