Brianne Gardner, senior wealth manager, Velocity Investment Partners, Raymond James
FOCUS: North American large caps
Top Picks: VISA, CHEVRON, CNR
MARKET OUTLOOK:
While the speed of the nine per cent pullback for the S&P 500 Index may have triggered a bit of anxiety for some, it’s a common occurrence and actually the second one of the year now, after April’s six per cent drop. Even for those Magnificent Seven stocks, who saw prices drop 10-30 per cent, this was quite normal.
When the price of something is more than 50 per cent higher than it was a year ago, seeing some profit taking that can drop the price considerably is not unusual. While some markets have now rebounded, August is historically a weak month, along with September, and we would not be surprised if the indices finish the month in the red. There are bright spots though, including bonds behaving like bonds again. Gains in the fixed-income market have offset some of the declines in the equities, as are defensive sectors and real estate on the back of soft economic data and higher rate cut expectations.
This is why it is important to have diversification in your portfolio so that when one segment of your investments pulls back, another area generates returns to make up for it. Earnings season has been strong, helping prop up elevated stock valuations. Looking forward, we are still very much optimistic on the rest of the year. Despite the uncertainty of the U.S. election and the fact that eyes and ears are still firmly focused on interest rates, we believe we are far from a market top and this bull market still has another year or two to go.
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VISA (V NYSE)
Visa is the world’s leading credit and debit card issuer. The fintech company has a market cap of just above $500 billion, making it one of the 20 biggest in the world. While shares remain flat year-to-date, the stock is up 45 per cent over the past five years and has beaten the S&P 500 over the last 10 and 15 years. It also trades at a reasonable valuation, has strong free cash flow and has excellent profit margins. The company reported a solid third quarter that featured 10 per cent year-over-year (YoY) revenue growth. Cross-border volume was a key growth driver, up by 14 per cent YoY. The company’s growth and strong financials helped the firm reward shareholders with $5.8 billion worth of stock buybacks and dividend distributions. Relative to American Express and PayPal, Visa is one of our preferred payment processors to own, with a target of $300 (12.5 per cent potential growth).
CHEVRON (CVX NYSE)
One of the biggest energy stocks in the world, Chevron. The company has plans to invest $10 billion in clean energy projects through 2028. Oil has remained subdued due to macroeconomic headwinds, and CVX has seen its price move sideways in the last 12 months, a divergence from Exxon, one of its main competitors. I see this as a good opportunity, as the stock also offers a robust dividend yield of over four per cent. It’s worth noting that last September, the company acquired a majority stake in the world’s largest proposed storage facility for hydrogen. This isn’t surprising, as Chevron produces one million tons of hydrogen annually. The acquisition is likely a step towards further expansion of hydrogen production. This is not a stock we own at the moment, but on our watch list and ranks a 10/10 fundamental for us with good margins, earnings growth, cash flow and other ratios. With a $178 target, we think we could get 20 per cent upside from here.
CNR (CNR TSX)
The company’s recession-resistant business model and conservative earnings growth outlook make it a great long-term investment. It’s one of two rails we like, and Canadian National Railway’s 10 per cent price drop could make a good time to either average down or add the position. CNR has lagged CP and UNP in performance but has very strong free cash flows, and better operating margins. Last year, earnings increased 15 per cent year over year despite the company’s revenue slump and increased economic uncertainty. Assuming all things run smoothly from here, management should see 10-15 per cent earnings per share (EPS) growth through 2026. The stock ranks a 9/10 for us and we see 16 per cent upside from here with a $180 price target.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| V NYSE | Y | Y | Y |
| CVX NYSE | N | N | N |
| CNR TSX | Y | Y | Y |
Canadian Natural Resources (CNQ TSX) (2 for 1 stock split 6/11/24)
- Then: $84.86
- Now: $50.28
- Return:18%
- Total Return: 24%
Tourmaline Oil (TOU TSX)
- Then: $67.56
- Now: $63.44
- Return:-6%
- Total Return: -0.6%
Merck & Co (MRK NYSE)
- Then: US$108.93
- Now: US$114.01
- Return:5%
- Total Return: 7%
Total Return Average: 10%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CNQ TSX | Y | Y | Y |
| TOU TSX | Y | Y | Y |
| MRK NYSE | Y | Y | Y |