Ross Healy, chairman at Strategic Analysis Corporation; portfolio manager, MacNicol & Associates Asset Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

There are times in the stock market when it is better to just let events drift rather than try to make something happen. This is one of them. Values in the market are thin, notably in the U.S. market, which means that trying to capture whatever growth potential there might be could be a fool’s errand.

Investors are spending a lot of time attempting to parse every move of the U.S. Federal Reserve Board and trying to get out in front of the Fed by second-guessing the moves they hope, believe or expect will take place. Almost everyone, including the Fed, has been wrong about inflation and how pernicious it is proving to be. As well, whenever there are rate hikes this large and this fast, it’s too early to tell what the fallout will be but you can bet, based on previous rate cycles, that things will get ugly somewhere.

Examining the big movers in the October to January rally, it is clear that investors expect that nothing has really changed. The winners in the last bull will be the winners in the next bull so they bought them willy-nilly. And small wonder, the next big cycle winners are still in the formation stage.

Does this mean that there is nothing to be done? Historically, in these markets, looking for strong, defensive values has been a winning formula. Forget swinging for the fences and just get on base. A “bear market” is a sorting process. Poor values are identified and weeded out, but strong values can be rewarded. They’re also good trading markets as investors are unwilling to let go.

The Canadian market is a far superior value compared to the U.S. This doesn’t guarantee that it will go up right now, but it will tend to outperform its U.S. counterparts, especially in the longer term.

This time, I decided to go for a cheap, very defensive, income-oriented portfolio with about zero probability of any dividend cut. Little possibility of much market excitement but how much excitement do we want this year? The yield, plus maybe five to 10 per cent capital gains would make a nice, double-digit year that you don’t have to worry about. (I will be curious to see whether the past year’s capital gains-oriented portfolio held over will beat the new income-oriented portfolio).

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TOP PICKS:

Birchcliff Energy (BIR TSX)

Excellent and very adequately covered yield, decent price potential and a sound and solid balance sheet.

TC Energy (TRP TSX)

Very nice, adequately-covered yield with good upside potential, very close to its 10-year valuation low. Asset sales should ensure that its Coastal Gas Link project will be safely funded and its record of steady dividend increases should remain intact.

Verizon (VZ NYSE)

Excellent, well-covered yield, good price potential, you have to go back 35 years to find the shares at a cheaper price/book valuation. Should prove to be very defensive with excellent recovery potential. 

PAST PICKS: February 17, 2022

Power Corporation of Canada (POW TSX)

• Then: $41.90
• Now: $37.55
• Return: -10%
• Total Return: -5%

Agnico Eagle Mines (AEM TSX)

• Then: $71.35
• Now: $62.96
• Return: -12%
• Total Return: -8%

Crescent Point Energy (CPG TSX)

• Then: $8.56
• Now: $9.80
• Return: 14%
• Total Return: 18%

Total Return Average: 2%