Paul Harris, partner and portfolio manager, Harris Douglas Asset Management

FOCUS: North American and global large cap

MARKET OUTLOOK:

Nothing much seems to be affecting this market — not an inflation shock, not an interest rate shock, not a war shock, not a debt-ceiling shock. The risk to the market is that, nearly 90 per cent of this year’s advance in the S&P 500 has come from seven companies — Apple, Microsoft, Alphabet, Amazon, Tesla, Meta Platforms, and Nvidia.

April was a great month for the stock market (+1.5 per cent) so long as you weren’t in materials (flat), consumer discretionary stocks (-1.0 per cent), industrials (-1.2 per cent), regional banks (-2.7 per cent), transports (-2.9 per cent), and small caps (-2.9 per cent). The U.S. Federal Reserve and other central banks reiterated that their priority remained the fight against inflation even with the fallout in the financial sector.

We continue to believe a “higher for longer” position from the Fed, and other central banks. Meanwhile, we continue to see a lot of complacency in the market, with the VIX in the 20s. We think you need to see the VIX closer to 35 before you can start discussing a capitulation bottom and the end of the bear market. Nevertheless, this an opportunity for analysis and purchase some great companies that you wish to hold for the long term at reasonable valuations.

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TOP PICKS

Bank of America (BAC NYSE)
Bank of America is one of the largest banks in the United States holding 10 per cent of all deposit in the country. The bank continues to reduce cost through reduction in headcount and technology. The company continues to improve its capital base with Tier 1 ratio at 12 per cent. The stock trades at 0.9 times book value and eight times earnings. The company yield of 3.3 per cent. We think the intrinsic value of $50. It has diversified business with a large percentage of earnings from fee income.

TD Bank (TD TSX)

Canada’s second largest bank. TD has developed a strong franchise in the U.S.  The stock trades at 1.4 book value, 10.0 times 2021 earnings, 4.6 per cent dividend yield.

Visa (V NYSE)
Visa is like a toll both when you use the card, Visa gets .15 basis points per transaction. It processes over 65,000 transactions per second. Today 17 trillion in consumer transactions still use cash and has good organic growth internationally. Visa still has growth in the business-to-business market especially with loyalty programs. We think we will see acceleration in revenue growth into the teens driven by 1) an improving macro backdrop; 2) successful competitive changes around pricing; 3) faster-than-anticipated consumer payment innovations such as mobile payments.  Visa offers long-term secular-driven stocks especially benefiting from COVID as more people use less cash, and should provide solid organic growth with opportunities for margin expansion. Visa is expected to generate 19.0 billion in free cash flow in 2023

Past Picks: May 24, 2022

FirstService Corp (FSV NASD)

• Then: US$117.73
• Now: US$146.01
• Return: 24%
• Total Return: 25%

Zoetis (ZTS NYSE)

• Then: US$163.05
• Now: US$184.96
• Return: 13%
• Total Return: 14%

Walt Disney (DIS NYSE)

• Then: US$101.59
• Now: US$92.22
• Return: -9%
• Total Return: -9%

Total Return Average: 10%