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

FOCUS: North American and global large caps

MARKET OUTLOOK:

The main issues facing the market are inflation and interest rates. The U.S. Federal Reserve and other central banks have reiterated that their priority remains the fight against inflation. We continue to believe in a “higher for longer” position from the Fed and other central banks. The risk is that COVID-19 caused a dislocation in the global economy that we may see further surprises to the upside for the economy. The economy may be stronger than expected, inflation lower and the much-talked-about recession may be short-lived and soft. I think the Fed rates will rise another 50 basis points and stem inflation and, more importantly, inflationary expectations. We believe that rates are normalizing around the world and this is important for investors as they now have a choice for their investable assets.

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TOP PICKS:

TD Bank (TD TSX)

TD, Canada’s second-largest bank, has developed a strong franchise in the U.S.  The stock trades at 1.4 book value, 10 times 2021 earnings, 4.8 per cent dividend yield. TD has strong capital ratios and a diversified business with a large percentage from fee income.

Stryker (SYK NYSE)

Stryker is one of the world’s leading medical technology companies. The company offers innovative products and services in orthopedics, medical and surgical, neurotechnology and spine and with the acquisition of Wright Medical, will have products for hands and ankles these products  help improve patient and hospital outcomes. The company has 73 per cent of its business in the U.S., 21 per cent is international (developed markets) and six per cent in emerging markets. Great demographic play as the population ages the Stryker’s product become more useful and helpful, furthermore, there is somewhat of an annuity with medical tech products as once surgeons start and learn they tend not to change. SYK is a well-diversified company and with its strong balance sheet should be able to manage through any macroeconomic pressures.  SYK is generating nearly US$3.3 billion of free cash flow in 2022 of which approximately 25 per cent being used for dividends. This still leaves the majority of SYK's annual free cash flow that could be used for M&A and pay down debt. They cover their interest payments 11.4 times and have a high free cash flow conversion rate.

Johnson & Johnson (JNJ NYSE)

It’s the world’s largest and most diverse health-care company. It has two divisions: pharma and medical devices. The stock trades at 15 times 2023 earnings, and has a dividend yield of 2.9 per cent. Although the company has IPO and distributed its consumer products division, it has the opportunity to use the cash to make acquisitions in pharma and medical devices.