Barry Schwartz, chief investment officer and portfolio manager, Baskin Wealth Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

The significant divergence between the performances of the Nasdaq Composite and the S&P 500 Index versus the S&P/TSX Composite Index this year reminds us about the importance of diversification by business quality. Investors were beaten up last year by owning too many “tech” or “growth” names. This year, investors are being punished for owning commodity, cyclical and financial names. You will never own all the right investments in any one year. In fact, if every stock that you own is working in one year, you are probably not well-diversified. Being diversified means that you own different companies that will have different performances in different environments in the short term. Over the long run, what counts is owning businesses run by excellent managers that know how to create value. 

The price for any individual stock is based on only two things: the earnings of the company and the value the market places on those earnings on a forward-looking basis. The first input, the actual performance of each company is what we focus on. For us, success means buying companies that consistently meet or exceed their earnings targets and often, raise their dividends.

The second input, the value the market puts on those earnings, is out of our control. It is based on sentiment and emotion. When times are bad, or when interest rates are very high, forward earnings are not highly valued, and stock prices go down even when earnings are good. When people are happy and the economy is strong, the value of forward earnings rise and multiples expand. Warren Buffett’s oft-repeated explanation, “In the short run the market is a voting machine; in the long run it is a weighing machine.”

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TOP PICKS

Amazon.com (AMZN NASD)

 Amazon’s stock is up around 50 per cent this year as we have seen a strong recovery for technology stocks. We think the future for Amazon is very bright given its tailwinds to a growing demand for global e-commerce and cloud computing. We believe that the new chief executive officer, Andy Jassy, has taken the right steps to increase profitability and we look forward to free cash flow inflected higher from here. 

Stryker (SYK NYSE)

Stryker is a perfect investment to benefit from a global aging population. The company is the market leader in selling medical devices for hip and knee replacements. The company’s secret sauce is its close relationship with surgeons and a higher quality product than its competitors. Stryker is expecting a "supercycle" of new product launches in 2023 and 2024 which typically has higher prices.

FirstService (FSV TSX)

FirstService is North America’s largest property manager for condos and multi-family buildings. It is a growth-by-acquisition story and still has a small market share of property management. This is a sticky business, condo boards don’t like to change managers and usually sign up for multiple-year contracts with inflation escalators. As FirstService grows bigger it can save condo boards money with its economies of scale – buying power for equipment and services to run a condo. It is also building a national company to provide restoration in N.A.  When there is a terrible weather event, like ice storms, fires, floodings, and tornadoes; it hopes by creating a market leader it can offer insurance companies the best service and price.