Barry Schwartz, chief investment officer and portfolio manager, Baskin Wealth Management

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

Most people are certain that the outlook will worsen from here and those fears are probably well founded. Interest rates continue to march higher, inflation has come down but is still too high and there is broad-based uncertainty in the global economy. It is possible that January’s returns were just another bear market rally, or maybe stock prices have already anticipated a lot of the bad news that is yet to come. We remind investors that the stock market generally falls well in advance of a recession and generally recovers well in an advance of noticeable economic improvements. For example, the stock market bottomed in March 2009, almost two years before we saw a meaningful improvement in the U.S. housing or unemployment numbers.

Recessions may be upsetting but they are not events that should ever cause one to make significant changes to one’s portfolio. If we are heading into a recession, it is impossible to know how bad it will be, how long it will last, which industries will be affected the most and if stocks have already priced in the worst of the effects. 

Our approach as always is to own great companies, run by management teams that have navigated each business well during other tough times. We own many of the greatest businesses the world has ever seen, Apple, Visa, Google, Microsoft, Costco, Ferrari, Berkshire Hathaway, Constellation Software and Adobe to name a few. These companies sell products and services that people cannot live without. Management of the companies we own are all prepared for a potential slowdown. Some are harvesting cash waiting to pounce on acquisitions, others are ready to buy back stock if it falls to depressed levels and for most, it is business as usual.  

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TOP PICKS:

Alphabet (GOOG NASD)

It is now priced as a value stock with limited growth potential. Nothing can be further from the truth. We are in a down market for digital search ads but we expect a cyclical rebound later in 2023. In the meantime, the company continues to have many dominant platforms including search, YouTube, Cloud and its Play Store. A renewed focus on cost-cutting as well as a pivot to incorporating AI technologies should lead to much stronger profits in the years to come. We estimate that Alphabet will repurchase at least $60 billion of shares in 2023. 

TMX Group (X TSX)

It should see a meaningful improvement in earnings growth in 2023. Although financings are at cyclical lows, a rebounding stock market should lead to stronger capital market activities. The company has initiated several pricing initiatives and its strong balance sheet allows it to be active on acquisitions if something attractive is available. TMX’s valuation is undemanding given its defensive attributes. The company has become a dividend aristocrat having raised its dividend every year since 2016.

CN Rail (CNR TSX)

The stock pulled back after the release of its fourth-quarter earnings. CN turned in a remarkable year in 2022 with earnings per share rising 25 per cent. However, its guidance for 2023 was very conservative, especially considering the company buys back a lot of stock each year. In 2022, CN also under-promised and over-delivered and we hope its conservative stance for 2023 will allow it to beat and raise earnings estimates throughout the year. The company has increased its dividend for 27 years in a row.  

PAST PICKS: March 3, 2022

TFI International (TFII TSX)

• Then: $134.42
• Now: $157.36
• Return: 17%
• Total Return: 19%

FirstService (FSV TSX)

• Then: $179.81
• Now: $191.07
• Return: 6%
• Total Return: 7%

Waste Connections (WCN TSX)

• Then: $165.79
• Now: $178.10
• Return: 7%
• Total Return: 8%

Total Return Average: 11%