Chris Blumas’ Top Picks: April 13, 2022
Chris Blumas, Portfolio Manager, Raymond James Investment Counsel Ltd.
FOCUS: North American Large Cap Equities
All eyes are on the US Federal Reserve as it tries to fight high inflation and stage a soft landing for the US economy. Inflationary pressures were expected to moderate this year, but Russia’s aggression in Ukraine and the prospect of further shutdowns in China have created additional pressures on the supply chain that may be more lasting in nature.
While high energy prices, rising interest rates and declining government aid will undoubtedly hamper future economic growth, consumer spending is expected to remain strong in the near term. Consumer spending is the largest component of US GDP (~70% in 2021) and is fueled by strong household savings, low unemployment and rising wages.
In this economic context, the Federal Reserve initiated a sharp “reversal” of monetary policy by reversing course and launching plans to reduce its balance sheet and increase interest rates. With a wealth-to-income ratio at an all-time high (~25% above its previous peak) and overall credit growth expected to remain weak, the most speculative pockets of financial markets could be vulnerable to a correction as liquidity is removed from the financial system.
With low nominal interest rates and negative real yields, investors who hold cash and low yielding fixed income securities risk losing purchasing power over time. While it can be difficult to make investors’ money grow in this uncertain environment, equities still appear to be an attractive asset class for investors. Going forward, I think investors should remain well-diversified and defensively positioned. Some sectors of the stock market looking to offer attractive value include certain technology companies, diversified REITs and financial services companies.
Brookfield Asset Management (BAM.A TSX)
Last purchase at $73.10 on 2022-04-05
Brookfield is a direct investor and third-party asset management firm with a unique focus on real assets and private equity. The firm is one of a handful of global private equity players that are uniquely positioned to raise significant capital from institutional clients as they shift their portfolios to higher yielding asset classes. Although the company has three publicly traded operating subsidiaries, these securities do not offer investors exposure to the rapidly growing asset management business. Over the past 12 months, total assets under management increased 17% to US$365 billion, while distributable earnings before realizations increased 23%. The shares currently trade at 12 times funds from operations and have a free cash flow yield of nearly 4%.
Walt Disney (DIS NYSE)
Last purchase at $135.55 on 2022-04-05
Disney is a global media and entertainment company that generates revenue by distributing original content, providing guest experiences at its parks and resorts, and selling consumer products. Disney shares have fallen nearly 30% over the past year as structural flow issues have negatively impacted investor sentiment. In its latest quarter, Disney+ subscribers hit 130 million (up 37% year-over-year) and revenue from its Parks, Experiences and Products segment hit an all-time high as visitors were returning to its attractions and spending per capita exploded (up 40% year-on-year). Going forward, it will take time for Disney to return to its pre-pandemic level of profitability, but its unique strengths and digital capabilities improve its competitive position and create a platform that should help drive future growth. of EPS. The shares are currently trading at a 20% discount to a conservative sum-of-the-parts valuation of $162 per share.
Alphabet (GOOGL NASD)
Last purchase at $2,794.26 on 2022-04-01
Alphabet is an investment holding company. The company’s biggest asset is Google, which accounts for 99% of Alphabet’s revenue. Google generates more than 80% of its revenue from online advertisements and generates the rest from the sale of applications, content and cloud services. As ad dollars continue to move online, Google is uniquely positioned to continue growing revenue and cash flow. Last year, the company’s revenue and free cash flow increased by 41% and 56%, respectively, compared to the previous year. On the negative side, Google continues to face increased regulatory pressure to protect user privacy and reduce its dominance online. The shares are currently trading at nearly 23 times forward earnings. However, this valuation does not take into account the excess cash on the company’s balance sheet ($125 billion or $185 per share) or the hidden value associated with its cloud services business or its seed technology investments. .
PAST CHOICES: June 8, 2021
Abbott Laboratories (ABT NYSE)
- So: $107.90
- Now: $117.81
- Return: 9%
- Total return: 11%
Artis REIT (AX-U TSX)
- So: $11.44
- Now: $13.14
- Return: 15%
- Total return: 22%
Enghouse Systems (ENGH TSX)
- So: $53.41
- Now: $39.33
- Return: -26%
- Total return: -25%
Average total return: 3%