Gordon Reid, president and chief executive officer, Goodreid Investment Counsel

FOCUS: U.S. equities 

MARKET OUTLOOK:

There is evidence that the equity rally is beginning to broaden. The divergence between a handful of mega-cap tech stock’s performance and the rest of the market has been well noted in 2023. Fewer than 10 of the 500 stocks in the S&P 500 index account for all the positive performance of the index this year. The AI phenomenon has further exacerbated the situation, with money flows cascading into anything AI.

Evidence is mounting that things may be changing. Why? Because the magic of self-correction and balance is increasing the interest in the unloved masses of stocks that have been becoming more and more attractive because of improving fundamentals and negative price moves. Goodreid’s small-cap portfolio now trades at just over 10 times earnings yet has projected earnings growth next year of 17 per cent. Apple’s stock is larger in market capitalization than the entire market cap of the 2,000 companies in the Russell 2000 Index.

This is a valuable lesson for all investors. Build portfolios around quality and value and let the money flow come to you. Chasing money flow may have short-term benefits but requires a nimble touch. Secondly, avoid concentration. Successful stocks are often bunched within the same sector because their success is related to top-down or macro reasons, not company-specific execution. If they go up for the same reason, they can also come down for the same reason, so set concentration rules and diversify by industry, sector and dollar weighting. 

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TOP PICKS:

Freeport McMoRan (FCX)

The price action of FCX in 2023 clearly illustrates the cyclical nature of copper. China’s sputtering recovery, the war in Ukraine, worries about a global recession and higher interest rates have all been headwinds. But the long-term story is intact and at the current price FCX is attractive.

Merck (MRK)

Merck is a timely stock in a distressed market. A triple “A” balance sheet, strong earnings predictability and a relatively recession-proof business, makes it a good choice, but that is not reason enough to own a stock. What puts Merck in our portfolio is its strong pipeline, growing earnings and cash flow at two to three times GDP, a dividend yield of 2.8 per cent and an attractive valuation of 15 times earnings.

Toll (TOL)

Ironically, homebuilders are benefitting from higher mortgage rates. Most U.S. homeowners took advantage of the “near zero” era and locked in rates well below current offerings. This has led to a tepid re-sale market that could last a while, directing new buyers to the new home market. When coupled with their high-end offering and attractive valuation, TOL ticks all the boxes.