Darren Sissons, partner and portfolio manager, Campbell, Lee & Ross Investment Management
FOCUS: Global, technology stocks
Top Picks: Hermes International SCA, Nestle SA, Visa
MARKET OUTLOOK:
Surprisingly, 2024 has been a strong return year with most investors enjoying a slew of new, ever-increasing, all-time highs throughout the year. The positive performance occurred in spite of elevated real interest rates, a deteriorating economy, rising unemployment, and sticky service inflation. Three Bank of Canada interest rate cuts helped at the margin and especially so for international portfolios. However, the lagging impact of a high real interest rate will continue to hurt the economy over the near term. Further, given that Canadian bank loan books typically have a three-year plus duration (the average time to fully re-priced their loan book), the economy still has three more years of interest rate-induced pain ahead.
Also of concern, is the sustained tensions in the Middle East. The large-scale Iranian rocket attack on Israel, regardless of your political view of the event, is worrisome if viewed through an oil lens. The attack increased the possibility of a larger and or regionalized conflict, and the curtailment of the Middle East oil supply. Given broader oil and oily derivatives are roughly 20 per cent of the global economy, a sustained spike in oil prices would be a catalyst for higher inflation.
Looking positively into year-end, fund managers will progressively re-balance winners and de-risk their portfolios into the fourth quarter to maintain their performance numbers. Opportunities to deploy capital into that re-balancing would include high dividend-yielding names, that trade at hefty discounts to their historical valuation metrics and which react positively to falling interest rates. Quality blue chips that have progressed through a recent period of underperformance but where management has taken corrective action should also be positioned for outperformance.
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TOP PICKS:
Hermes International SCA (RMS EPA)
A progressive dividend, yielding 1.2 per cent, which has grown at an 18 per cent annualized average rate for ten years. A fortress balance sheet given the mountain of cash reserves. It has a plus 20 per cent return on equity and a plus 40 per cent return on invested capital. Demographically positioned to outperform in a weak economic environment as its products target the ultra-high net worth via products such as its Birkin handbag, which ranges from US$40,000 – $450,000. Never inexpensive or discounted, so for value buyers, you can only ever buy it during periods of economic weakness.
Nestle SA (NESN SWX)
Progressive dividend, currently yielding 3.60 per cent, has grown at an average annualized rate of 5.7 per cent for a decade. The company experienced deteriorating economic value add generation over 2021 and 2022, which contributed to the recent share price decline as did the replacement of the chief financial officer. A growth mandate is now in place and given Nestle is priced at a discount across most valuation metrics vis-à-vis its 10-year valuation metrics, it is attractively priced for new investors.
Visa (V NYSE)
A modest but progressive dividend, currently yielding 0.75 per cent, grew at an annualized rate of 21 per cent for a decade. A business model that is effectively a tolling tax on consumer and corporate consumption. 3) A Visa investment here is a tactical trade in addition to a longer-term value creator. During recessions, like precision clockwork, U.S. regulators roll out punitive credit card legislation and the sector falls. The share price decline provides an opportunistic window to re-load larger equity weights into the name at attractive entry levels. Then, post a brief hiatus, Visa re-assumes its upward trajectory.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| RMS EPA | Y | Y | Y |
| NESN SWX | Y | Y | Y |
| V NYSE | Y | Y | Y |
PAST PICKS: OCTOBER 5, 2023
British American Tobacco PLC (BTI NYSE)
- Then: US$ 30.51
- Now: US$ 35.17
- Return:15%
- Total Return: 27%
Canadian Natural Resources (CNQ TSX)
- Then: $ 82.90
- Now: $ 49.65
- Return:20%
- Total Return: 25%
Johnson & Johnson (JNJ NYSE)
- Then: US$ 157.14
- Now: US$ 160.04
- Return:2%
- Total Return: 5%
Total Return Average: 19%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BTI NYSE | Y | Y | Y |
| CNQ TSX | Y | Y | Y |
| JNJ NYSE | Y | Y | Y |