David Baskin, president, Baskin Wealth Management

FOCUS: North American large caps

MARKET OUTLOOK:

Central bankers around the world are determined to choke inflation. This will involve continued increases in interest rates for at least the next three months. The main source of inflation at this time is wage increases, and the U.S. Federal Reserve has clearly stated that it will raise rates until the labour market is brought into balance through the reduction of employment demand. This is positive for industries with a lot of lower-paid workers (Amazon, Walmart, etc) but negative for capital-intensive industries which will see the cost of their debt burden rise.

We are already seeing many investors move funds out of equities and into bonds, which are now much more attractive than they were in the past four years. Yields of over five per cent are now available at low risk. This will reduce demand for stocks which have served as bond surrogates during the low-interest rate years, such as banks, REITs, utilities and pipelines.

The large technology stocks have suffered considerable drawdowns over the past year and are now, in our view, oversold. We expect to see a significant recovery led by these companies in 2023. 

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Restaurant Brands (QSR TSX)

Restaurant Brands is franchisor of Tim Hortons, Burger King and Popeyes. Despite the strong brands, shares have traded at a discount to peers due to poor execution under 3G’s leadership. We think the recent appointment of Patrick Doyle as executive chairman is a catalyst for improving performance. We expect Doyle will implement best practices from his successful tenure as chief executive officer of Domino’s Pizza such as improving franchisee relations and investing in digital technology. We believe shares have at least 50 per cent upside if Restaurant Brands can achieve a multiple similar to other fast food chains.

Live Nation Entertainment (LYV NYSE)

Live Nation is the world’s largest concert promoter and is the owner and operator of Ticketmaster. Live Nation is a beneficiary of the secular growth in concerts as an irreplaceable experience and also as artist earnings increasingly come from touring. Shares have sold off due to reports of antitrust investigation and poor ticketing execution regarding Taylor Swift’s tour. We believe that antitrust risks are overblown, and think that shares are attractively valued at 13x EBITDA.

Brookfield Asset Management (BAM.A TSX)

Shares of alternative managers including Brookfield have sold off due to rising interest rates and recessionary fears, but Brookfield’s focus on resilient infrastructure assets and high-yield capabilities at Oaktree should allow for strong investment performance through a recession. Brookfield continues to execute well on fundraising and has $125 billion in deployable capital to capitalize on weak markets. A potential catalyst for the stock is the upcoming listing by way of a stock spin-off of a 25 per cent stake in the asset management business on Dec. 12, which we expect to achieve a premium valuation given its 90 per cent dividend policy and long-term capital base. 

PAST PICKS: January 25, 2022

Netflix (NFLX NASD)

• Then: $366.42
• Now: $306.56
• Return: -16%
• Total Return: -16%

Canadian Apartment REIT (CAR.UN TSX)

• Then: $54.14
• Now: $43.59
• Return: -19%
• Total Return: -17%

JPMorgan Chase (JPM NYSE)

• Then: $146.53
• Now: $132.07
• Return: -10%
• Total Return: -8%

Total Return Average: -14%