Stephen Takacsy's Top Picks: September 25, 2023
Stephen Takacsy, president CEO and CIO, Lester Asset Management
FOCUS: Canadian stocks
MARKET OUTLOOK:
Equity and fixed-income markets continue to be volatile on fears of sticky inflation, higher for longer interest rates, and an economic slowdown. We believe that this volatility has presented some excellent buying opportunities in both stocks and bonds. In equity markets, a handful of tech stocks have been responsible for most of the rise of the S&P 500 Index, with the rest of the market lagging, despite a still strong economy and generally good earnings. In Canada, oil stocks and Shopify are largely responsible for most of the S&P/TSX Composite Index's positive return.
Small-mid cap stocks have really struggled this year and present particularly compelling valuations trading well below intrinsic value. Fixed income markets currently provide the most attractive risk-return, particularly in short-term corporate bonds which are yielding “equity-like” returns of six per cent to eight per cent with little to no risk. Investors should take advantage of this unique opportunity since these high rates won’t last with inflation coming down from elevated year-ago levels and the economy slowing. We believe that the rate hiking cycle is over, although central banks will continue to maintain a hawkish tone to get inflation back down to the two per cent to three per cent target range.
We believe there will be a “soft landing” in Canada and the U.S. as their economies remain resilient with low rates of unemployment. Investor sentiment has been very bearish which is a great contrarian indicator with lots of cash on the sidelines. Our fixed income portfolio is mainly comprised of higher-yielding short-term corporate bonds and yields over seven per cent with a duration of only 3.5 years, while our stock portfolio remains well diversified in recession-resistant businesses most of which are generating record profits. We also own many safe high dividend-yielding stocks like telecoms, pipelines, utilities, and banks which look particularly attractive at the moment. We also own companies benefiting from long term trends such as aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, Tecsys, and ATS), and infrastructure (Stella Jones, AG Growth, Logistec). We have been taking advantage of volatility to add to our holdings in high quality companies at more reasonable valuations such as Pet Value, Jamieson Wellness, Richelieu Hardware, CCL, and Colliers International.