Barry Schwartz, Chief Investment Officer and Portfolio Manager, Baskin Wealth Management
Focus: large stocks in North America
Baskin Wealth Management prefers to focus simply on owning high-quality business rather than trying to time the fluctuations associated with interest rates, as business quality and earnings growth are ultimately what drives the stock price in the long run.
Stock price movements often drive the narrative and investors are now questioning the competitive position of many of these companies, but the simple fact is that for high-growth, high-growth stocks, even a small change in interest rates can have a huge impact on the value of a stock’s price. Add to the fact that many of these companies are also seeing slower growth due to COVID reopening and supply chain issues, and the sharp drop in stock prices isn’t surprising.
Although we certainly have no idea when the stock market or sector performance will turn, there are encouraging signs. Shares of some former major clients rose significantly after earnings despite poor financial results and a disappointing outlook, suggesting sentiment is improving. Valuations for many growth stocks are now at all-time lows and are trading at lower multiples of low-growth consumer goods and utilities stocks. Google, whose revenue is growing 15-20 percent annually, trades at a lower P/E than Colgate-Palmolive, which should increase sales 2-3 percent at best.
Although the recent withdrawal is painful, we do not want to double the error by changing our investment strategy and selling our high-quality companies when it is unfavorable. Paying for defensive stocks now by selling cheap growth companies would be akin to selling low and buying high: the exact opposite behavior an investor should have.
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Adobe (ADBE NASD)
Adobe’s creative software business (essentially 2/3 of sales and all earnings) is one of the top companies in the world as a high-margin, steady, and recurring revenue business that capitalizes on a secular tailwind of growth in digital consumption and creative jobs. After a decade of mergers and acquisitions to build their enterprise data business, Adobe told investors that the future focus will be on margin expansion and stock buybacks. With stocks trading at 25 times earnings, this is a fair price for a fast-growing business.
Visa (V NYSE)
Visa is one of the best companies to benefit from the reopening of travel as well as rising inflation. We expect cross-border transactions to return to pre-pandemic levels this year and this should significantly increase Visa’s earnings. At the same time, the company is undoubtedly well positioned to take advantage of the secular tailwind of digital commerce. Visa and its counterpart, MasterCard, act as toll roads for consumer and business spending. With prices rising around the world, credit card networks are expected to reap the gains.
National Bank (NA TSX)
We were dazzled by the latest National results. The company posted the highest revenue growth of any of its peers at 9% in the second quarter and its credit losses were immaterial. We think stocks are very attractive with less than 10 times forward earnings and offer investors a dividend yield of close to 4 percent.
Previous Picks: Jul 19, 2021
Live Nation Entertainment (LYV NYSE)
- Then: $74.79
- Now: $94.53
- Yield: 26%
- Total Return: 26%
Black Rock (BLK NYSE)
- Then: $845.16
- Now: $663.39
- Yield: -22%
- Total Return: -20%
Flooring and Decoration (FND NYSE)
- Then: $103.95
- Now: $75.24
- Yield: -28%
- Total Return: -28%
Average total return: -7%