Lorne Steinberg’s Top Picks: November 1, 2022 – BNN Bloomberg

Lorne Steinberg, President, Lorne Steinberg Wealth Management

FOCUS: Global Value Equities and High Yield Bonds

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MARKET OUTLOOK:

Aggressive rate hikes by the US Federal Reserve and the Bank of Canada, while painful for borrowers, are yielding the desired results as economic activity slows. At the same time, the strength of the US dollar is having a negative impact on the profits of American companies, which is compounding the difficulties for investors.

The inflation rate remains high due to the war in Ukraine as well as ongoing supply chain issues. However, there are signs that inflation is peaking and that this rate hike cycle may well be over by the first quarter of 2023. This explains why the yield curve is inverted. Short-term bond yields are higher than longer-term yields, indicating that investors believe the Fed will start cutting rates within the next year or two – a reason for investors to stay the course despite the negative feeling.

Warren Buffett’s comment about “buying when investors are scared” still rings true in times like these. The stock prices of many of the world’s largest companies have been significantly reduced. Investors have the opportunity to buy these companies offering attractive dividend yields and excellent total return potential. Waiting for “things to get better” usually results in buying those same companies at much higher prices in the future.

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TOP CHOICES:

Diageo (DEO NYSE)

Diageo is the world’s largest spirits producer with brands such as Smirnoff vodka, Johnnie Walker whiskey and Guinness. The company has unrivaled distribution and is focused on increasing its exposure to premium brands. Organic revenue is expected to grow in the 4-5% range, while margins are expected to gradually increase. Free cash flow funds dividend growth and share buybacks. Investors have the opportunity to buy a large company at a price that offers an attractive advantage.

State Street (STT NYSE)

State Street is a leading provider of custodial, recordkeeping and other related services to the institutional asset management industry. It is an oligopolistic business, with only one other major competitor of the same size, so the company is well positioned in its markets. The company has gained market share over the past few years and has generated consistent earnings and dividend growth while maintaining a conservative capitalization. It is primarily a fee-based business model based on assets under administration, so revenues are somewhat market sensitive. Stocks have fallen this year and investors have the opportunity to buy a market leader at a discount.

Taiwan Semiconductor (TSM NYSE)

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s leading chipmaker and today acts as a subcontractor for some of the largest companies in the industry. The industry is an oligopoly, with only three big players and TSMC is the best in the business. The demand for chips is growing as the technology becomes more integrated into products such as automobiles. TSM is undergoing a major expansion in response to the chip shortage and revenues are poised to rise sharply in 2024. At the current valuation, the stock is trading convincingly at a P/E of 10 with a yield in dividends of 3%.