Teal Linde, manager, Linde Equity Fund

FOCUS: North American mid and large-cap stocks 

MARKET OUTLOOK:

People have lost a lot of money in their portfolios since September due to a widespread belief in the U.S. Federal Reserve’s Sept. 20 hawkish outlook that rates will stay higher for longer. The market reacted so harshly as if the outlook was a certainty, but when you consider the Fed’s poor forecasting track record, you realize you can’t really count on it. There are many examples where its forecasts have missed the mark. Below are just a few of the big ones.

May 2007 – Ben Bernanke states: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” The following year, the U.S. economy entered its worst financial crisis since the Great Depression and the stock market crashed 50 per cent.

March 2020 – Jerome Powell states: “So, with this coronavirus arriving, we judged that the—the net effects of this will be to— to have inflation move down even a little bit more.” It turned out quite different.

February 2021 – Jerome Powell states: “I really do not expect that we’ll be in a situation where inflation rises to troubling levels.” Not quite so.

December 2021 – The Fed forecasted that it would need to raise rates three times and that its policy target rate would end in 2022 between 0.75 per cent and one per cent. Oops again. The Fed raised the Fed funds rate seven times in 2022, ending the year with a target rate at 4.25 per cent-4.50 per cent.

With this kind of forecasting track, would you really want to make important investment decisions or do long-term financial planning based on outlooks provided by an institution with this kind of track record?  Better think twice. 

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TOP PICKS:

COLLIERS (CIGI TSX)

Last purchased on Oct. 19  at $122.65

Rising rates have impacted stock, bond and real estate markets. One way to take advantage of the selloff is to buy assets that are expected to bounce back once interest rates decline. However, a better way is to buy such assets that are also able to take advantage of the market downturn to become more valuable upon a recovery than they otherwise would have been. Such assets are often companies pursuing counter-cyclical growth strategies.

Also, very little value is being ascribed to Colliers’ brokerage business on a sum-of-the-parts basis at current share price levels. The combination of a management team capitalizing on weak market conditions, a major part of their business being assigned minimal value, and management’s long term track record of creating shareholder value points to an attractive entry point for Colliers.

ROYAL BANK OF CANADA (RY TSX)

Last purchased on Oct. 30 at $109.29

Canadian bank stocks have all sold off sharply over the last couple of months including Royal Bank which can now be bought at just under 10 times next year’s expected earnings with a dividend yield of around 4.65 per cent. Another way to look at the attractiveness of Royal Bank is through its price/book multiple. Royal is currently trading close to 1.5 times book value, which is a similar price/book multiple reached during the early months of COVID-19 when the market fell over 30 per cent. Over the last decade, Royal’s average price/book ratio was around 1.8. Therefore, an immediate reversion to a 1.8 multiple would result in close to a 20 per cent increase in share price. However, such a recovery may take a year or two or longer, and during this time, the company’s book value will likely increase as it has for the last 29 consecutive years in a row. So a 1.8 times multiple applied to an increasing book value per share will result in excess of a 20 per cent share price return, plus the dividend yield on top.  

DELTA AIR LINES (DAL NYSE)

Last purchased on April 18 at $35.17

A sector that is still down considerably since pre-COVID-19 is the airlines. Airlines were among the hardest hit stocks during the pandemic as air travel dropped as much as 90 per cent. However, even with air travel roaring back, planes full, and ticket prices high, many of their share prices are still not much above where they traded in 2020. Granted, airlines have issued stock and/or raised a lot of debt during the pandemic to cover losses. But these factors are not enough to justify such discounted valuations for an industry that has successfully emerged from the worst period of airline history. Delta has shown greater deft in maneuvering through the pandemic and appears better positioned than its competitors to outperform the industry in the years ahead. This is due to its strategy of allocating far more premium seats (along with enhanced passenger service) that are more profitable than economy-class seats, in their planes than its peers. Delta is ranked the number one airline by the Wall Street Journal for five of the last six years and number one by Conde Nast Reader’s Choice Awards. It is a favourite among analysts with a higher proportion of strong buy and buy recommendations than United, American and Air Canada by Wall Street analysts. This leading airline can be bought today at only 5.5 times 2023 expected earnings, and five times next year's expected earnings. 

PAST PICKS:

ENSIGN ENERGY SERVICES 

• Now: $2.29
• Return: -41%
• Total Return: -41%

AIR LEASE 

• Then: US$37.59
• Now: US$37.72
• Return: 0.3%
• Total Return: 2%

BANK OF NOVA SCOTIA

• Then: $68.48
• Now: $59.05
• Return: -14%
• Total Return: -8%

Total Return Average: -16%