Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

Inflation and interest rates continue to dominate the headlines, as markets price in some central bank easing in 2024. Despite the tougher rate environment, the global economy has remained resilient, and the International Monetary Fund (IMF) recently increased its forecast for gross domestic product (GDP) growth this year and next. With inflation continuing its downward trend, we expect that central bankers will reduce rates at least somewhat this year, which would lighten the burden on indebted consumers and provide enough of a boost to keep the economy out of recession.

For investors, 2024 has started off where 2023 ended as the technology and communication sectors have been among the best performers, while most everything else is treading water. The result is that there are a number of world-class companies whose share prices remain cheap, despite the fact that the market indices are hitting new highs. Banks, healthcare and consumer stocks are among the most beaten up and all of these should benefit from lower rates. We should also note that as the U.S. market has dominated the global indices, there is much value to be found in Europe, Japan and the U.K., all of which have been virtually ignored over the past several years.

The concept of value has seemingly been forgotten, as a small group of stocks have driven market performance, but the value of a company is a function of its business model, earnings growth and financial strength, and there is much value to be found in the market today.

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TOP PICKS:

Compass Group PLC (CPG LON)

Compass Group is the global leader in contract catering, providing food services to corporations, food courts, hospitals, schools, sports stadiums, defence and offshore installations. While this may not sound like an exciting business, the company has delivered consistent growth as it has gained market share in a highly fragmented industry. Sixty per cent of revenues are in the U.S., with Europe and the U.K. the other major markets. As the market leader, Compass has successfully leveraged its economies of scale through its buying power, execution expertise and vast footprint to increase its margins while growing revenues. The industry is growing as its customers seek to lower costs through outsourcing, and Compass is a major beneficiary of this trend. The company is using its free cash flow for share buybacks and dividends, as well as looking for acquisitions. We anticipate 10 per cent earnings per share (EPS) growth over the next few years, and at the current valuation, the shares offer excellent value. 

Nike (NKE NYSE)

Nike is one of the world’s best-known brands and is the global leader in both athletic footwear and sportswear. This company has had an impressive track record of exceptional organic growth, eschewing acquisitions in favour of investing in product development and marketing/distribution.  Margins should improve as the company is increasingly selling its product through its channels (Nike stores, website and app). The company’s significant free cash flow has resulted in steady dividend increases and share buybacks. The share price fell sharply over the past couple of years due to slowing growth in China, and margins declined. We anticipate that margins should start to recover later this year and that the shares will return to the premium valuation they deserve. 

Starbucks (SBUX NASD)

Starbucks is another world-class company whose share price has dropped recently, in large part due to the slowdown in China. This company has had an enviable track record, generating impressive revenue growth, while maintaining hefty profit margins. The latter should come as no surprise to its customers, who gladly pay $8 for a pumpkin spice latte! Revenues have consistently grown at the eight to nine per cent level, and the company has been able to offset cost inflation through price increases. China accounts for about 10 per cent of sales, and the company should be able to maintain its growth rate through new store growth and increased same-store sales. The recent share price weakness provides an excellent entry point for investors. The shares pay a 2.4 per cent dividend, with the payout expected to increase annually for years to come. 

PAST PICKS: NOVEMBER 1, 2022

Diageo (DEO NYSE)

• Then: US$167.60
• Now: US$145.36
• Return: -13%
• Total Return: -11%

State Street (STT NYSE)

• Then: US$74.40
• Now: US$73.74
• Return: -2%
• Total Return: 2%

Taiwan Semiconductor (TSM NYSE)

• Then: US$61.58
• Now: US$113.99
• Return: 85%
• Total Return: 90%

Total Return Average: 27%