Stan Wong’s Top Picks for July 11, 2024

Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs.

Top Picks: Lennox International, Netflix, Novo Nordisk

MARKET OUTLOOK:

Global equities have demonstrated continued stamina in 2024, with notable performance driven by U.S. mega-cap growth stocks. The S&P 500 Index has gained over 18 per cent year-to-date, while the tech-heavy Nasdaq Composite Index has surged more than 24 per cent. Meanwhile, the Dow Jones Industrial Average and the S&P/TSX Composite Index have delivered more modest growth, both rising just over five per cent year-to-date. From a sector perspective, the U.S. technology space has carried its leadership position from 2023 into 2024, leading all other sectors. In contrast, the real estate and materials sectors have been performance laggards this year.

In our view, the technology sector presents a complex landscape for investors, offering both substantial opportunities and significant risks. While the sector boasts strong growth potential in areas such as cloud computing, artificial intelligence (AI), and cybersecurity, it also faces challenges that warrant careful consideration. One of the primary concerns is the current high valuations, with the S&P 500 Information Technology Index trading at price-to-earnings, price-to-free cash flow, and price-to-sales ratios near 20-year highs. This raises questions about excessive investor exuberance and the potential for increased volatility ahead. Overall, it is critical to maintain a well-diversified portfolio aligned with proper risk and return objectives. Additionally, having a comprehensive financial plan in place can help investors navigate market oscillations effectively.

From a global economic perspective, the world economy is demonstrating remarkable tenacity with projected growth of three per cent for both 2024 and 2025. Growth is uneven, however, with advanced economies accelerating slightly while emerging markets potentially slowing down. Last month, the Bank of Canada and the European Central Bank were the first major central banks to cut interest rates this year, signalling a shift in monetary policy. In the U.S., consumer spending remains strong, and inflation appears to be moderating, raising hopes for potential interest rate cuts later this year. The U.S. labour market remains tight, with the unemployment rate steady at 4.1 per cent. Here at home, Canada’s economy is expected to slow for the remainder of 2024 as retail sales moderates, manufacturing softens, and home sales shrink. Canada’s unemployment rate has ticked higher in recent months to 6.4 per cent today.

At The Stan Wong Group, we maintain a constructively optimistic outlook for equity markets. Decelerating inflation and falling interest rates along with a record level of U.S. money market assets (now at US$6.15 trillion) should help keep market sentiment positive. In Stan Wong Managed Portfolios, our focus remains on identifying high-quality, secular growth companies to strengthen our portfolio mandates. We favour such sectors as health care, consumer discretionary, financials, and technology (provided valuations are reasonable). Geographically, our equity allocation comprises approximately 60 per cent U.S. equities, 25 per cent Canadian equities, and 15 per cent international equities. Within our fixed income allocation, we favour government and investment-grade corporate bonds with both short and medium durations. Overall, our strategic allocation aims to enhance returns while prudently managing risk for our clients.

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TOP PICKS:

Lennox International (LII NYSE)

Last bought this month at ~US$540

Lennox International manufactures and distributes heating, ventilating, air conditioning, and refrigeration (HVACR) products to replacement and new construction markets. Replacement sales represent 75 per cent of overall sales while new construction represents 25 per cent of sales. More than two-thirds of sales come from residential HVAC units while nearly 90 per cent of overall revenue is generated from the U.S. The company enjoys strong brand recognition and an extensive distribution network, allowing it to maintain a strong competitive advantage and growing market share. Longer-term, the company is well positioned to benefit from favourable industry trends such as elevated demand for more energy-efficient and environment friendly residential and commercial HVAC systems. Aging infrastructure, increasing urbanization, and rising global temperatures further contribute to the demand for advanced climate control solutions. LII shares have been trending upwards since mid-2022 with a clear channel of higher highs and higher lows. Lennox International is forecasted to achieve an average annual earnings growth rate of more than 15 per cent over the next several years. The company reports its next quarterly results on July 24.

Netflix (NFLX NASD)

Last bought in May 2024 at ~US$550

With over 260 billion global subscribers and nearly US$39 billion in projected fiscal 2024 revenue, Netflix continues to dominate the subscription streaming service industry. The company’s focus on original content production has allowed it to differentiate its service and build a global customer base loyal to its diverse library of shows and films. Netflix continues to expand its footprint into emerging markets, tapping into significant subscriber growth potential. The company’s introduction of advertising-supported subscriptions offers an additional revenue stream, attracting cost-conscious consumers and advertisers seeking premium inventory. With a clear uptrend channel of higher highs and higher lows, NFLX shares have been outpacing the broader S&P 500 Index since early-2022. As well, the shares appear poised to break out above its late 2021 highs. Netflix is forecasted to achieve an annual earnings growth rate of over 35 per cent over the next several years. At just one times PEG ratio (price-earnings to growth), NFLX shares are relatively inexpensive compared to most other technology and communications stocks. The company reports its next quarterly results on July 18.

Novo Nordisk A/S ADR (NVO NYSE)

Last bought this month at ~US$136

Headquartered in Denmark, Novo Nordisk is a leading global healthcare company and is Europe’s most valuable listed company with a market capitalization of over US$635 billion. Novo Nordisk holds a dominant position in the rapidly growing diabetes and obesity treatment markets. The company currently supplies half of the world’s insulin and commands one-third of the diabetes treatment market. With over 40 million people worldwide benefiting from Novo Nordisk’s drugs, the company is experiencing unprecedented growth, driven by continued consumer demand for blockbuster medications Ozempic, for diabetes treatment and Wegovy, for weight loss. Additionally, promising cardiovascular, liver and kidney benefits from NVO’s drugs could further drive sales growth. Longer-term, global demographic trends, including rising obesity rates and an aging population, provide a favourable long-term demand outlook for Novo Nordisk’s products. From a technical perspective, NVO shares have been outpacing the broader market indices since early 2017, maintaining a strong upward trend. Looking forward, Novo Nordisk is poised to deliver an annual earnings per share growth rate of over 25 per cent in the coming years. The company is scheduled to report its next quarterly results on Aug. 7.

PAST PICKS: July 27 2023

ASML Holding N.V. (ASML NASD)

• Then: $708.12
• Now: $1095.35
• Return:55%
• Total Return: 56%

Canadian Pacific Kansas City (CP TSX);

• Then: $109.64
• Now: $112.14
• Return:2%Total Return: 3%

Mercedes-Benz Group ADR (MBGYY OTC)

• Then: $19.72
• Now: $17.37
• Return:-12%
• Total Return: -5%

Total Return Average: 18%