Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: Global value stocks and fixed Income
Top Picks: Allstate, CVS, Nestle
MARKET OUTLOOK:
One outcome of the U.S. election has been a stock market rally, driven by the prospect of less government regulation as well as tax cuts. As if that wasn’t enough to bring good cheer to investors, the expectation of further rate cuts from the U.S. Federal Reserve is also helping to boost investor optimism.
The U.S. economy remains relatively strong, but growth is more muted in Europe, Canada and elsewhere. The slowdown in China continues to be an impediment for earnings growth among many multinationals, and the government there is implementing yet another stimulus package. While further stimulus may still be required, we expect that China’s economy will stabilize over the next year, providing some balance to global growth.
The strong performance of U.S. corporate earnings, and the aforementioned policy initiatives, combined with various geopolitical issues, has resulted in a strengthening of the U.S. dollar against most other currencies.
With the weakness of the Euro and the Yen, investors have the opportunity to buy foreign assets at cheaper prices. Europe, the U.K. and Japan have been ignored by investors for years, resulting in a wide valuation gap when compared to the U.S. market.
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TOP PICKS:
Allstate (ALL - NYSE)
Allstate is an exceptionally well-run property and casualty insurer, as evidenced by its enviable track record of free cash flow generation. This company is a model of value creation, as it has bought back over half of its shares over the past fifteen years, while growing its market share and raising dividends.
The insurance sector has raised premiums significantly over the past couple of years and Allstate’s earnings are expected to grow by over 10 per cent annually for the next few years.
At the current price, the shares trade at a price to earnings ratio (P/E) of 11, with a 1.8 per cent dividend yield, offering significant upside with a comfortable margin of safety.
CVS (CVS - NYSE)
CVS is arguably the best-positioned company in the U.S. healthcare delivery industry. U.S. reimbursement models are evolving to value-based care, and the company is leveraging its medical, pharmacy and lab data to deliver a lower cost, more effective model. Pharmacies can provide cheaper delivery of a number of services including administering the COVID-19 vaccine, which will help drive growth.
Earnings have been disappointing due to a variety of issues including industry reimbursement issues, soft retail environment as well as the time taken to integrate acquisitions. However, these issues are being addressed, and we expect substantial earnings growth going forward.
At a P/E of 10, with a 4.8 per cent dividend yield, these shares present a compelling opportunity for capital appreciation.
Nestle S.A. (NSRGY OTC)
Nestle is the world’s largest food company selling everything from bottled water and dairy products to pet food, chocolate and coffee. Its three largest categories are coffee (25 per cent of sales), pet care (20 per cent) and Nutrition and Dairy (18 per cent). The company also owns about 20 per cent of L’Oreal (which accounts for 18 per cent of its market capitalization).
After years of industry-leading growth, revenues have stagnated, and the company recently replaced its CEO. We expect the company to review its various operations, and to prune its portfolio of any underperforming assets. At the same time, revenues are poised to start growing again in 2025. With the shares trading at close to a 10-year low, and a four per cent dividend yield, this is an opportunity to buy a great company at a very fair price.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ALL-NYSE | Y | Y | Y |
| CVS-NYSE | Y | Y | Y |
| NSRGY-OTC | Y | Y | Y |
PAST PICKS: OCTOBER 20, 2023
CIBC (CM TSX)
- Then: $48.67
- Now: $93.83
- Return: 93%
- Total Return: 100%
Kenvue (KVUE NYSE)
- Then: $19.74
- Now: $22.90
- Return: 16%
- Total Return: 21%
Kering SA (PPRUY OTC)
- Then: $42.52
- Now: $25.23
- Return: -41%
- Total Return: -37%
Total Return Average: 28%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CM-TSX | Y | Y | Y |
| KVUE-NYSE | Y | Y | Y |
| PPRUY OTC | Y | Y | Y |