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

FOCUS: North American and global stocks 

MARKET OUTLOOK:

The main issues facing the markets are inflation and interest rates. The U.S. Federal Reserve and other central banks have reiterated that their priority remains 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.

The risk is that COVID-19 caused a dislocation in the global economy and we may see further surprises to the upside for the economy and the stock market. The economy may be stronger than expected, inflation may be lower and the much-talked-about recession may be short-lived and soft. I think that the Fed will rates rise another 50 basis points and stem inflation, and more importantly, inflationary expectations. Nevertheless, this is an opportunity to analyze and purchase some great companies that you wish to hold for the long term at reasonable valuations.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS

TD Bank (TD TSX)

Canada’s second-largest bank. TD has developed a strong franchise in the US. The stock trades at 1.4 book value, 10 times 2023 earnings and has a 4.8 per cent dividend yield. It 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 as well as neurotechnology and spine. With the acquisition of Wright Medical, it 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 Stryker’s products become more useful and helpful. Furthermore, there is somewhat of an annuity with med 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 $3.3 billion of free cash flow in 2022 of which around 25 per cent is being used for dividends. This still leaves the majority of SYK's annual free cash flow that could be used for mergers and acquisitions and to pay down debt. It covers its interest payments 11.4 times and has a high free cash flow conversion rate.

Johnson & Johnson (JNJ NYSE)

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

PAST PICKS: October 17, 2022

Alphabet (GOOG NASD)

• Then: US$100.78
• Now: US$137.56
• Return: 36%
• Total Return: 36%

Zoetis (ZTS NYSE)

• Then: US$149.79
• Now: US$186.24
• Return: 24%
• Total Return: 25%

FirstService (FSV TSX)

• Then: $167.07
• Now: $206.69
• Return: 24%
• Total Return: 24%

Total Return Average: 28%