Mike Vinokur, portfolio manager at MV Wealth Partners with iA Private Wealth
Focus: North American large caps
Top Picks: Lincoln National, Suncor, Uber
MARKET OUTLOOK:
Passive investing distorts stock prices, as capital inflows are spread across index stocks regardless of their intrinsic value, leading to potential overvaluation. As more money rushes into index exchange traded funds (ETFs), they are forced to buy more of the biggest weighted securities regardless of price. The money inflow further increases demand. Markets are driven by animal spirits and FOMO (fear of missing out). As optimism intensifies that the market will no doubt rise, a positive feedback loop is created. Despite market irrationality, value investors should remain patient and focus on high-quality, undervalued companies, adhering to disciplined, long-term investment strategies. In the very near term, it is possible that prices will continue to surge. In fact, most strategists we follow believe that the S&P 500 Index will no doubt end the year higher by some 10-15 per cent or more. Where have all the bears gone? As value investors, we believe that the risk-to-reward ratio is not adequate in the broad U.S. indices, however we are finding good businesses trading at discounted valuations.
We are currently carrying a higher-than-normal cash position in our equity-based model portfolios given that we feel sentiment is a little too exuberant. We expect markets to correct at some point in the first or second quarter providing us with opportunities to redeploy our cash.
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TOP PICKS:
Lincoln National (LNC NYSE)
Lincoln National is one of the oldest lifecos in the U.S. The company sells life insurance, annuities, group protection etc. What is notable is that as of the last quarter its book value was close to $47 per share yet the stock still trades at $32. You would think there is a problem with the business. We cannot seem to find one. In fact, we bought the position because they finally got their regulatory capital above 420 per cent which is a comfortable level from which they may be able to increase the dividend or initiate a share buyback program which would be very accretive given the current share price. While we wait for capital appreciation we earn a 5.6 per cent dividend.
Suncor (SU TSX)
Suncor is one of Canada’s largest integrated energy companies. We like the energy patch because like Rodney Dangerfield, they don’t get any respect at current valuations. The market is not rewarding Suncor for the work it has done in getting the balance sheet in pristine condition allowing it to maximize returns to shareholders without putting the enterprise in danger. We think the stock goes higher even if the price of oil doesn’t. However, if we do get some kind of geopolitical shock and oil prices escalate above what the strip currently predicts, there is much more meaningful upside in valuation than our current FMV. In the meantime, we collect a 4.3 per cent dividend while we wait and the company itself steps in to repurchase and retire stock adding some level of support to the share price.
Uber (UBER NYSE)
We are quite pleased with Uber and its management team. Since it went public, the company has grown quite impressively. We like its diversified business model between Freight, Uber Eats and Rideshare. We would not be surprised if they develop more complementary businesses within their huge network. We are impressed with the Uber one membership uptake and offerings in long haul rides. Uber has not only proven it can keep growing at a fast clip, but that the net revenue growth actually hits the bottom line. Its cash flow and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are now much higher and will gain even more operating leverage as each incremental net revenue dollar converts into a higher percentage of free cash flow.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| LNC | N | Y | Y |
| SU | Y | N | Y |
| UBER | Y | N | Y |
PAST PICKS: May 9, 2024
Johnson & Johnson (JNJ NYSE)
- Then: US$149.85
- Now: US$146.49
- Return: -2%
- Total Return: 0.2%
Rogers Communications (RCI.B TSX)
- Then: $53.82
- Now: $44.60
- Return: -17%
- Total Return: -14%
Fedex (FDX NYSE) - Sold Fedex for clients and personally at $295
- Then: US$262.06
- Now: US$277.50
- Return: 6%
- Total Return: 7%
Total Return Average: -3%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| JNJ | N | Y | Y |
| RCI.B | N | Y | Y |
| FDX | N | N | N |