Mike Vinokur, portfolio manager at MV Wealth Partners with iA Private Wealth

FOCUS: North American large caps 

MARKET OUTLOOK:

We are cautiously optimistic about equity markets given that markets have been able to discount a lot of bad news this year. This included debt ceiling standoffs, two wars being fought simultaneously, geopolitical tensions between the world’s two largest economies and worries about the recession that just won’t come – yet. We believe that we are in a seasonal period of strength in which markets tend to do well. Long-term interest rates have come down significantly from their peak in October, giving market participants less angst for the moment about the U.S. government’s ability to continue deficit financing and its spending spree. With lower interest rates, discounted cash flow valuations can increase giving equity markets cover to move higher. Lastly, employment trends, at least in the U.S., remain quite strong. The latest reading on productivity was better than expected and moving in the right direction. This may lead to sustainably high operating margins and growing earnings expectations.

The market is not the “Magnificent Seven.” While valuations are stretched for some growth equities, there are many companies and industries that have not yet participated in this year’s rally and are trading at a discount as compared to the rest of the market. We are finding opportunities that have a margin of safety at current valuations with enticing risk/reward. Currently, broad markets are a little overbought and may pull back. However, we have been adding individual positions strategically over the last few weeks and will continue to do so if and when prices pull back to our buy target range.  

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TOP PICKS:

CVS Health (CVS NYSE)

CVS is an inexpensive way to participate in the healthcare sector. It owns the CVS brand pharmacy, Aetna one of the largest HMOs in the U.S., Pharmacy Management and health care through a newly acquired subsidiary. On its latest earnings call it guided to $8.5 to $8.7 in earnings per share (EPS) which means the stock is trading for eight times earnings. With competitor Rite Aid recently declaring bankruptcy, we believe CVS will be able to grab market share. We recently purchased CVS at $68.75 to average down our position in the last few weeks. 

ONEX (ONEX TSX)

We have followed ONEX for a very long time. Under the leadership of Gerald Schwartz, ONEX became a private equity powerhouse in Canada. It owns many businesses, however one that viewers may recognize is WestJet. While Mr. Schwartz is no longer at the helm, he built a deep bench of talent. We have faith in the current management’s ability to execute and accrete value to shareholders. The current CEO, Mr. LeBlanc, has been with the organization for almost a quarter century and should continue to lead in the same manner as Mr. Schwartz had. Since the peak in January 2022, the stock price had a significant tumble, while the value of the business has increased. Management has taken notice and has increased its share buybacks at what we believe are huge discounts to intrinsic value. We purchased a position at $79.90 in late summer. 

Manulife Financial (MFC TSX)

We view MFC as a best-of-breed lifeco in terms of capital adequacy, geographic diversification, and total return potential. We believe the current environment is great for lifecos. Unlike the banks, it has very little, if any, credit exposure (though we note that MFC does own a schedule one bank, though small compared to its lifeco operations). At its last quarterly earnings call, it held LICAT (life insurance capital adequacy test) capital level of 137 per cent, which underscores its robust levels of capital. In an environment of higher interest rates, we believe lifecos will earn more on assets, which should add incremental strength to earnings. With core return on equity of approximately 17 per cent, adjusted book value of just under $31 and growing, and a dividend yield of 5.5 per cent, there is a lot to like. We have owned Manulife for a few years and purchased our position at $25.5.