Brianne Gardner, senior wealth manager, Velocity Investment Partners at Raymond James Ltd
FOCUS: North American large caps
Top Picks: Visa, United Health Group, Lululemon
MARKET OUTLOOK:
The markets are in full bloom with optimism on the road ahead! Interest rate expectations have stayed a key driver of volatility and market direction. We are now at 95 per cent probability of a U.S. Federal Reserve rate cut by September, with Fed Chair Jerome Powell indicating the necessity for pre-emptive measures rather than waiting for inflation to hit the two per cent target.
Since the market is so acutely focused on when rate cuts will start, all eyes are on the economic data and earnings for signals of what to expect. It’s still the same story we’ve heard for a while - weak economic data is positive for markets, and strong data is negative. Whereas a year ago there was a lot of concern over a recession, those fears are all but gone right now. This is due to a healthy but softening labour market and resilient retail sales figures showing shoppers are still spending money.
The first half of the year was very strong, thanks primarily to continued concentration in the Magnificent Seven, and July has continued that trend. We are now seeing the start of the rotation from laggards to leaders on a catch-up trade. The S&P/TSX Composite Index is outperforming the U.S. markets so far in July thanks to the materials sector which is being driven by the metals such as gold, silver, and copper. Canada is likely to continue to cut rates faster than the U.S. and this could add some tailwinds to Canadian stocks in the second half as well. We expect some volatility in the short-term leading up to the U.S. presidential election, and then a strong rally once that uncertainty is gone.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart, or wherever you get your podcasts
TOP PICKS:
VISA (V NYSE)
Visa has a big competitive advantage as it has established a near-duopoly in the payments processing market. There’s a societal shift towards cashless transactions, which many believe still has a long way to go, yet Visa is one of the largest beneficiaries of this change and it has helped the company’s profit margins. Visa’s reliable sales streams, operational model, and willingness to adapt to new trends and markets are just some of the reasons Visa stock returned more than 400 per cent over the past decade, doubling the S&P 500’s performance. We have a $311 price target on it, which implies a potential 15 per cent upside from here.
UNITED HEALTH GROUP (UNH NYSE)
It’s had a great rally recently and we are up nicely on the position but we still see more profits ahead with a $575- $600 target on the street showing more upside from here. The last earnings report was much better than many expected. UnitedHealth could also benefit from a Trump presidency that wants to reduce bureaucracy, with a focus on reduced regulation and improved reimbursement schedules under the Medicare Advantage program could give UNH a boost. The stock is now up 16 per cent in the last three months and has averaged nine per cent annually for the last three years and 16 per cent annually for the last five years and ranks a nine out of 10 fundamentally for us.
LULULEMON (LULU NASD)
This is a brand new addition to our portfolio – just picking it up this week, but we’ve actively traded the stock multiple times over the years. Retail has been one of the stock market’s primary pain points in recent months, especially with the high inflationary environment impacting spending on more discretionary items, like expensive yoga pants. We believe the stock is now oversold, the recessionary fears have all but faded, and the stock is at a 40 per cent discount to its 10-year average earnings multiple and less than half of its average cash flow valuation over the past decade. We have a $400 target on it which would be a 37 per cent return from here. We believe there’s a bigger picture to consider, and the market has lost sight of the long-term opportunity in front of this company.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| V NYSE | Y | Y | Y |
| UNH NYSE | Y | Y | Y |
| LULU NASD | Y | Y | Y |
PAST PICKS: August 23, 2023
Canadian Natural Resources (CNQ TSX)
- Then: $41.29
- Now: $49.34
- Return:19%
- Total Return: 24%
Tourmaline Oil (TOU TSX)
- Then: $67.12
- Now: $61.34
- Return:-9%
- Total Return: -4%
Merck & Co (MRK TSX)
- Then: $111.30
- Now: $125.29
- Return:13%
- Total Return: 16%
Total Return Average: 12%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CNQ TSX | Y | Y | Y |
| TOU TSX | Y | Y | Y |
| MRK TSX | Y | Y | Y |