Gordon Reid, president and chief executive officer, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

U.S. equity markets (as represented by the S&P 500 Index) are hovering just below the 4,000 mark, down 17 per cent for the year but off their low-level point by 13 per cent. Push and pull action is represented by the seasonal camp (Christmas rally), and the fundamentalists, who see inflation as persistent and a recession in early 2023. The put/call ratio within the options market shows the most bearish sentiment since 1997, paradoxically, a bullish signal for the market.

At Goodreid, we have always argued that the best way to invest is to focus on a long-term goal, multiple years down the road, which would relegate a 2023 recession into the “bump in the road” category. In the meantime, we practice prudent stock ownership, concentrating on active management, quality and diversification.

Looking back on 2022, one thing rang true and it has been a while since we've been able to really champion it. Active management has been a significant contributor to outperformance, beating passive investors significantly. Although many investors have run to the passive strategy of “buying an index,” 2022 proved that this approach is not a good one during uncertain and changing times.

With the growth of Exchange Traded Funds in the last decade, we have seen a similar increase in the prevalence of passive investing. And it is true that passive investing has had an impressive run in beating active managers. However, that claim comes with caveats. One is that the outperformance of passive investing in vehicles such as the S&P 500 Index can be attributed to just a handful of companies and those few companies have grown to a significant proportion of these passive holdings. Just six companies (think FAANG +MSFT), represent 20 per cent of the S&P 500 Index, while the other 494 issues share the remaining 80 per cent.  The bloom is off the rose. These are still good companies but are they going to be the leaders?

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TOP PICKS:

BankUnited (BKU NYSE)

BankUnited is a Florida-based bank primarily catering to individual and corporate clients. A well-supported dividend yielding about three per cent augments a growing loan book and solid earnings picture. This bank stock offers a 30 per cent discount to the average P/E within the regional banking group, it trades at book value and has a dividend payout ratio a third lower than the average bank issue.

Qualcomm (QCOM NASD)

At current prices QCOM offers a good opportunity to participate in the tech revolution of 5G, Internet of Things, automotive and other “chip” led transformations. Trading at just 9.5 times last year’s EPS, the semiconductor industry is likely to entrench this fiscal year as the current price reflects concerns of an imminent recession and exposure to a closed Chinese market. At this price, it pays to be patient.

Visa (V NYSE)

Revenues and earnings are growing very rapidly as the world moves to electronic processing in place of cash to settle transactions. International operations now account for 60 per cent of Visa’s transactions. Valuations have come in making this a long-term buy. Visa is the electronics payment leader by far, processing more transactions than all its competitors combined.

PAST PICKS: December 16, 2021

Bank of America (BAC NYSE)

• Then: $45.00
• Now: $33.37
• Return: -26%
• Total Return: -24%

Freeport McMoRan (FCX NYSE)

• Then: $38.28
• Now: $40.28
• Return: 5%
• Total Return: 7%

Jacobs Solutions (J NYSE) – formerly Jacobs Engineering **

• Then: $138.17
• Now: $124.64
• Return: -10%
• Total Return: -9%

Total Return Average: -9%