Stan Wong, portfolio manager at Scotia Wealth Management
FOCUS: Large caps and North American ETFs
MARKET OUTLOOK:
After a grueling September, stock markets have rebounded with the S&P 500 index up more than 7% so far in October. From our vantage point at the Stan Wong Group, we see market headwinds turning into tailwinds as inflation data reaches an inflection point. Prices for a wide range of commodities, including oil, natural gas, gasoline, copper and wheat, have fallen sharply from their highs at the start of the year. Housing and used vehicle costs also appear to have peaked. As a result, easing inflationary pressures will allow central banks to adopt a more accommodating tone over the coming months and quarters. In general, we remind investors that the best opportunities are found during the most uncomfortable and troubling times. Undeniably, bear markets represent times of tremendous opportunity for prudent investors who are able to look beyond short-term uncertainties.
From a fundamental perspective, the S&P 500 Index is now trading at a significant discount to its historical 10-year average, especially when we look at the S&P 500 Equal Weight Index which has a much lower weighting in the most expensive technology and communications sectors. From a technical analysis perspective, the recent bullish divergence signals seem to indicate the end of the downtrend. Interestingly, we note that since 1950 more bear markets have ended in October (over 35%) than in any other month. Upcoming seasonal trends could further help equities. Historically since 1950, we see that the S&P 500 index has never produced a negative return over one year following the American mid-term elections. In fact, the average one-year gain after the midterm elections was 14.7%.
In the Stan Wong managed portfolios, we continue to favor value stocks over growth stocks. The energy, healthcare and financial sectors seem to us to be the most attractive. We are underweight in the technology and communications sectors. Geographically, we prefer US and Canadian stock markets to European and Asian stock markets. The energy crisis in Europe and sluggish growth in China discourage us from these regions. In our fixed income allocation, we like inflation-protected bonds and short-duration corporate bonds, but we’ve also added some duration to higher-quality government and corporate bonds.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeartor wherever you get your podcasts
TOP CHOICES:
EXXON MOBIL (XOM NYSE)
Last bought in September at ~84 USD
Exxon Mobil is one of the world’s largest energy companies and is expected to generate more than $409 billion in revenue in 2022. Exxon’s huge portfolio holds more than 18 billion barrels of oil equivalent of proven reserves in 15 country. The company’s downstream operations account for nearly 80% of Exxon’s total sales. Its free cash flow yield of more than 11% remains very attractive. Like many large-cap energy companies, Exxon Mobil has focused on returning excess cash to shareholders and reining in capital spending and production increases. Earlier this year, Exxon management announced a tripling of its share buyback program to $30 billion. Overall, energy prices are expected to remain firm over the next few years given stable global demand, low inventories and industry-wide underinvestment. Exxon Mobil is currently paying an attractive 3.3% dividend yield and will release its next quarterly results on October 28.
STARBUCKS (NASD SBUX)
Last buy this month at ~83 USD
Starbucks is one of the world’s most recognized restaurant brands, operating nearly 35,000 stores in 80 countries. With more than $32 billion in revenue expected this year, Starbucks operates in three segments; North America, international markets and channel development (groceries and ready-to-drink beverages). The coffee chain generates revenue from company-operated stores, royalties, equipment and product sales to licensed partners, ready-to-drink beverages, packaged coffee and single-serve products. Over the next few years, management aims to return US$20 billion to shareholders in the form of dividend increases and share buybacks. Starbucks management also recently provided forward-looking guidance for strong growth in sales and earnings per share to come. In the longer term, SBUX will benefit from its leading market share in China and its exposure to the country’s growing middle class. Stocks are down 33% from last year’s highs and offer an attractive entry point. SBUX shares currently pay a dividend of 2.5% which is expected to increase over the next few years. The company will release its next quarterly results on November 3.
WALT DISNEY (DIS NYSE)
Last buy this month at ~103 USD
With more than $84 billion in revenue expected this year, Walt Disney is one of the largest and most recognized media and entertainment companies in the world. Disney is rapidly gaining market share in its direct-to-consumer streaming segment. Its combined streaming subscriber count, when combining Disney+, Hulu and ESPN+, now exceeds 221 million subscribers, rivaling Netflix. Disney’s parks and resorts segment is expected to rebound strongly from the pandemic shutdowns as pent-up travel demand intensifies. Finally, the future of the studio segment looks solid with a solid slate of upcoming content. Shares of DIS are down 50% from last year’s highs, offering attractive value to savvy investors. The company will release its next quarterly results on November 8.
PAST CHOICES: October 21, 2021
META (NASD META)
- So: $341.88
- Now: $131.98
- Yield: -61%
- Total return: -61%
Merck & Co (MRK NYSE)
- So: $81.17
- Now: $98.29
- Return: 21%
- Total return: 25%
iShares Global Financials ETF (IXG NYSEARCA)
- So: $88.95
- Now: $66.30
- Return: -20%
- Total return: -17%
Average total return: -18%
META NASD | NOT | NOT | NOT |
MRK NYSE | Yes | Yes | Yes |
IXG NYSEARCA | Yes | Yes | Yes |
#Stan #Wongs #Top #Picks #October #BNN #Bloomberg