MARKET OUTLOOK:

As we all know, markets go through different cycles. Sometimes growth stocks outperform, like they have done since the financial crisis. Sometimes value stocks outperform, like they did following the tech wreck and until the bottom of the financial crisis. And sometimes there are commodity cycles and super cycles, the most recent one being from 2003 to 2011.

Right now, with inflation rearing its ugly head and interest rates rising in response, we believe we are in the final days of the current gigantic growth stock cycle and beginning a value stock cycle along with a new commodity super cycle. 

As a result, we expect multiples on growth stocks, especially those with no or relatively small earnings to compress while multiples on value stocks increase and commodity stocks follow their underlying commodity prices higher. 

This doesn’t mean you should have a portfolio full of just value and commodity stocks but we believe it is time to increase their presence while reducing growth stock exposure, especially those companies who trade on a multiple of sales rather than earnings.

TOP PICKS:

Berkshire Hathaway (BRK/B NYSE)
Last bought on December 13, 2019 at $225.49 
Berkshire Hathaway is the ultimate value stock. It’s operating companies are mainly in insurance, railways, energy, and manufacturing. 

Value and cyclical stocks underperformed growth and momentum stocks by a wide margin for a number of years and value and cyclical stocks are finally starting to act well and Berkshire Hathaway is a great way to play this movement due to its large exposure to financials (Bank of America and American Express are its second- and third-largest public holdings), industrial, and rails, in addition to a number of technology stocks, including its by far largest single holding, Apple.

The main negative on the stock is the ages of Warren Buffett and Charlie Munger. While the stock will likely suffer in the short term when one or both of them die, the major decision making at the company has been in the hands of others for some time.

BHP Group (BHP NYSE)
Last bought on July 24, 2020 at $52.72 
BHP is the world’s largest mining company, based in Australia, whose main products include copper, iron ore, oil and gas (which it is exiting), and metallurgical coal. BHP stock, along with shares of other mining companies, has been weak since mid-summer. 

That is beginning to change as metal prices have been strengthening again, of late. I have long been of the belief that the only time investors should have a meaningful exposure to commodity stocks is when the price of the underlying commodities are rising or plateauing for a long time at a high and very profitable level. 

Metal prices, after a brief period of profit taking, are going up again. That, and the sell-off in shares that was related to non-operational issues, makes it a good time to buy BHP. It’s 9 per cent yield doesn’t hurt, either, but remember those dividends are subject to withholding tax. 

Tourmaline Oil (TOU TSX)
Last bought on November 5, 2020 at $18.53 
Tourmaline is a well-managed oil and natural gas producer, with assets in the Montney, Deep Basin and Charlie Lake areas of British Columbia and Alberta. 

The company provides mostly gas exposure (with a growing liquids presence) and owns what we believe to be the best producing and exploration profile of any company in B.C. It’s exposure to the growing California market is second to none and it will be a huge beneficiary when LNG exports from Canada finally begin. 
Tourmaline combines an excellent land/producing position with a very strong balance sheet and arguably the best management in the business. Natural gas prices look like they are headed higher, and not for just the short-term and Tourmaline will be one of the prime beneficiaries. 

In addition, it has promised to pay special dividends (as it did in September with a special $0.75 dividend) as its earnings increase as well as regularly increasing its quarterly dividend on a regular basis.

PAST PICKS: May 7, 2021

EssilorLuxotica (ELSOF OTC)

• Then: $170.75
• Now: $195.00
• Return: 14%
• Total Return: 14%

Estee Lauder (EL NYSE)

• Then: $303.35
• Now: $326.73
• Return: 8%
• Total Return: 8%

Amadeus IT Group (AMADF OTC)

• Then: $72.99
• Now: $71.24
• Return: -2%
• Total Return: -2%

Total Return Average: 7%