Gordon Reid, president and CEO, Goodreid Investment Counsel

MARKET OUTLOOK:

Looking back at market results in the third year of a U.S. presidential cycle, it is telling how 2023 has been a very close replication of historical norms. A strong start to the year, followed by a correction in late summer to early fall and a fourth-quarter Christmas rally is leading us toward a strong performance year. We wrote about market reactions within the presidential cycle in an article on our website. How does the market normally do in the final year of a presidential cycle? As a hint – stay invested!

Within the market, we continue to be wary of consumer-related stocks, and recent results indicate it is company-specific, with some issues plowing through any malaise while others are suffering. Technology led through much of 2023, but we are encouraged by a broadening of the market in the past few weeks. This could lead to a 2024 rotation and the laggards of this year, namely health-care and financials, getting some love. Finally, industrials have the benefit of almost US$2 trillion of fiscal stimulus in the form of U.S. legislation with the Chips Act, the Infrastructure Act, and the Inflation Reduction Act. We are overweight industrials in anticipation of good results.

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TOP PICKS:

Elevance (ELV NYSE)

Elevance, formerly named Anthem, is a managed care operator with 45 million members. The healthcare concern has stated expectations of long-term revenue growth of 10 per cent+ and EPS (earnings per share) growth of 12-15 per cent. Despite this, the stock is trading at a P/E (price to earnings ratio) of less than 13 times 2024 expectations, has a free cashflow yield of 6.7 times and pays a dividend currently yielding 1.3 per cent.

Merck (MRK NYSE)

Merck continues to be one of the powerhouse drug franchises in the world. Although profitability dipped in 2023 due to a fall-off in COVID-19-related drug sales. We expect a bounce back in 2024 on the back of its top-selling drugs; Keytruda and Gardasil. Healthcare stocks have lagged in 2023, but strong fundamentals will eventually win the day. At 12 times 2024 earnings estimates and growth of two the three times GDP we are optimistic.

RTX (RTX NYSE)

Raytheon is digging out of a major production issue, the discovery of contaminants in engine parts. Although it will result in a multi-billion dollar hit over the next few years, the strength of the business on both the commercial and defence side will overcome these charges. Meanwhile, the stock has adjusted from a high of over $100 per share to around $80. The disappointment will dissipate, and we expect a more fulsome valuation in future years. 

Past Picks: DECEMBER 13, 2022

BankUnited (BKU NYSE)

• Then: US$34.52
• Now: US$31.57
• Return: -8%
• Total Return: -4%

Qualcomm (QCOM NASD)

• Then: US$123.49
• Now: US$138.80
• Return: 12%
• Total Return: 15%

Visa (V NYSE)

• Then: US$213.04
• Now: US$262.38
• Return: 23%
• Total Return: 24%

Total Return Average: 12%