Lorne Steinberg, president, Lorne Steinberg Wealth Management
FOCUS: global stocks
Top Picks: Alphabet, JP Morgan, Johnson & Johnson
MARKET OUTLOOK:
Tariffs may not be, as U.S. President Donald Trump says, “the most beautiful word in the dictionary,” but it is certainly the most important factor impacting markets at present. After two consecutive years of double-digit returns, the market decline that we have seen would not normally be cause for concern.
However, what stands out in the current environment is the uncertainty surrounding trade policy and the potential for prolonged geopolitical and economic disruptions. The shifting stance of the U.S. administration—first threatening broad tariffs, then pausing, followed by targeted actions on steel, aluminum, and other goods—has created a fluid and unpredictable situation.
Rather than try to predict each policy shift, investors must focus on what we can control: building a well-diversified portfolio of high-quality companies. We are seeing the value of diversification this year. Over the past few years market performance was driven by the technology and communications sectors, while consumer stocks flatlined. However, over the past couple of months, the reverse is the case, as the consumer stocks have held up far better than most.
Steep market declines always create the best opportunities. Reducing equity exposure and “waiting for things to settle down” is always a mistake. Investors should not worry about the tariffs but instead focus on buying great businesses whose management teams will be able to navigate through these issues.
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TOP PICKS:
Alphabet (GOOGL NASD)
It has been a long time since Alphabet shares have been trading at such a compelling valuation. Advertising accounts for about 80 per cent of revenues, with cloud services at 13 per cent. Major drivers remain search, Android, Chrome, Maps and YouTube.
Profit margins remain extremely high at over 25 per cent, with significant cash flow being invested mostly in innovation and share buybacks. High research and development spend of close to $50 billion annually, suggests this company is well positioned for ongoing growth.
At the current price, the shares trade at a price-earnings ratio of 18, with double-digit revenue and earnings growth, a dominant market position as well as investments in a slew of leading-edge technologies.
JP Morgan (JPM NYSE)
JP Morgan has been the best run major U.S. money centre bank for years, under the leadership of CEO Jamie Dimon. The company is a market leader in most of its businesses and has always maintained a strong balance sheet as well as impeccable risk controls. This is one of the few U.S. banks that did not have to raise equity during the financial crisis.
The company has used its excess profits to expand its core businesses, while delivering healthy dividend increases and share buybacks. Bank stocks have tumbled recently, and JPM is no exception. Investors today could buy these shares at a price-earnings ratio of 13 with a 2.7 per cent dividend yield – outstanding value.
Johnson & Johnson (JNJ NYSE)
One of two remaining AAA-rated corporate issuers in the U.S., JNJ spun out its consumer business a couple of years ago and is now a pure healthcare business focused on pharmaceuticals and medical devices. The company invests almost 20 per cent of sales in research and development and has generated an enviable track record in innovation.
The shares are trading at a significant discount to fair value due to the ongoing talc litigation. The company had already set aside $7 billion to cover remaining settlements, but has recently announced, in a sharply worded press release, that if plaintiffs won’t settle, it will litigate individual cases. Regardless of how this plays out, even if the company has to increase its reserve somewhat, we do not expect that amount to be overly material.
Besides its pristine balance sheet and market leadership in its businesses, the company has raised its dividend for an astounding 62 consecutive years. At 15 times earnings, with a 3.2 per cent dividend yield, and excellent growth prospects this is another great value.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GOOGL NASD | Y | Y | Y |
| JPM NYSE | Y | Y | Y |
| JNJ NYSE | Y | Y | Y |
PAST PICKS: February 1, 2024
Compass Group PLC (CPG LON)
- Then: GBP£2143.00
- Now: GBP£2386.00
- Return: 11%
- Total Return: 14%
Nike (NKE NYSE)
- Then: US$101.76
- Now: US$53.45
- Return: -47%
- Total Return: -44%
Starbucks (SBUX NASD)
- Then: US$93.37
- Now: US$76.66
- Return: -15%
- Total Return: -12%
Total Return Average: -14%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CPG LON | Y | Y | Y |
| NKE NYSE | Y | Y | Y |
| SBUX NASD | Y | Y | Y |
