David Driscoll's Top Picks
FOCUS: Global stocks
In the past five years, stock markets went up too far, too fast, and became well overvalued. The old axiom, “don’t fight the Fed” has never been truer than today. Rising interest rates are not good for stocks.
For example, the S&P 500 Index traded at 26 times earnings last December and it now trades at 20.8 times. In other words, investors were willing to pay $26 for $1 of earnings five months ago. That number has now dropped to $20.80. Investors must understand that the historical P/E average is 16, meaning there could still be a further 20 per cent correction in stocks as rates rise. Only then would I be interested in dipping my toe into the stock market. Meantime, we’re sitting on the sidelines letting the cash build up in client portfolios.
I’m more bullish on the bond market than on stocks. Corporate bond yields are nearing five per cent and by the time the U.S. Fed ends its rate hikes, that yield could be closer to six per cent. After tax (three per cent), that provides better income than stocks currently do (the S&P 500 Index median dividend yield is 1.6 per cent). If rates rise too fast to fight inflation and the economy falls into recession, stocks could fall further but bonds may rally.
For investors, it’s important to understand that diversification (stock portfolios diversified by industry, sector and size of company) eases the downside losses during a correction. Couple that with stocks that have equal weights and are not correlated with each other and investors have a chance to live to see another day – they don’t have to sell everything or incur huge losses. They’ll make it back to break-even faster than those investors who put all their money into growth tech stocks, many with no revenues or earnings.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart, or wherever you get your podcasts
It offers life insurance, health insurance, investment and retirement savings and reinsurance businesses. The stock yields close to six per cent. Its earnings are stable and the dividend growth, while average at about six per cent in the past decade, is not in doubt. I believe it’s the least risky of all the Canadian financials.
Jardine Matheson Holdings (JM SP)
It is a southeast Asian holdings company with subsidiaries in automotive sales, real estate development, food retailing, luxury hotels, heavy equipment sales and leasing, financial services, IKEA and Starbucks franchises and restaurants. If the Chinese economy begins to open up, Jardine should be a benefactor. And if the U.S. dollar weakens, its earnings should improve as most of its profits are in emerging market currencies. The stock yields 3.78 per cent and trades at a low P/E multiple of nine times.
Spectris Plc (SXS LN)
It is a British company that trades on the London exchange. It harnesses the power of precision measurement to equip customers to make the world cleaner, healthier and more productive. Through a combination of its hardware, analytical and simulation software, Spectris provides its customers with superior data and insights that enable them to work faster, smarter and more efficiently to reduce time to market, and improve processes, quality and yield. The dividend yield is 2.46 per cent and the stock trades around 15 times future earnings.
PAST PICKS: June 7, 2021
Novo Nordisk ADR (NVO NYSE)
- Then: $81.20
- Now: $106.12
- Return: 31%
- Total Return: 33%
CCL Industries (CCL.B TSX)
- Then: $67.87
- Now: $57.13
- Return: -16%
- Total Return: -15%
Exponent (EXPO NASD)
- Then: $88.02
- Now: $89.41
- Return: 2%
- Total Return: 3%
Total Return Average: 7%