Michael Sprung, president, Sprung Investment Management

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

Volatile markets are likely to persist for some time. The pandemic highlighted the fragility of global supply chains and put a new focus on the need for secure sources of supplies. Shortages of necessary materials and components were already being reflected by inflation when the war in Ukraine added fuel to the inflationary fire, particularly in energy and food. All of this has occurred following a period of unprecedented government spending and massive accumulation of government, commercial and personal debt within an environment of extremely low-interest rates.

Central banks have reacted to the rise in inflation by rapidly increasing interest rates in order to choke demand as there is little that can be done to correct the supply imbalances. The restructuring of industry and supply chains is a long-term issue that may take many years to implement. The outstanding debt burdens reflect the consumption of the past at the expense of that in the future. Future economic growth and expansion will be constrained in this environment. Investors will need to look to companies with strong financial positions that can endure this transition. Companies that can more easily pass on the rising costs and have manageable debt repayment profiles will be advantaged relative to those with large capital requirements in the prospect of profitability far into the future.

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TOP PICKS:

CIBC (CM TSX)

Last Purchase March 2020 $77.25

CM is the fourth largest bank in Canada. Following the recent purchase of PrivateBancorp Inc., roughly 20 per cent of earnings now originate in the U.S. Over the next few years management intends to increase U.S. earnings closer to 25 per cent of the total. In the current environment, we anticipate that the bank's focus will be on organic growth and expense controls. CM has been proactive in building reserves against possible credit issues as interest rates rise. Net interest margins are expected to increase. At current levels, the stock is trading at a lower price-to-book ratio relative to the six major banks and the dividend yields an attractive 5.2 per cent.

Canadian Natural Resources (CNQ TSX)

Last Purchase June 2022 $67.72

CNQ is the largest senior producer in Canada with operations in Western Canada, the North Sea and West Africa. With a diverse asset base and an industry-leading cost structure, the company is well positioned to thrive going forward. CNQ has a strong balance sheet as debt has been significantly reduced. Once the debt is below $8 billion, increased share buybacks and dividends are anticipated. At current levels, the dividend yield is 4.2 per cent. CNQ is in the envious position of being able to fund sustaining capital and dividends if WTI drops to the mid US$30's, currently US$85.73.

CVS Health (CVS NYSE)

Last Purchase October 2021 $86.05

CVS is the largest health care company in the U.S. by revenue. Over the years, CVS has transformed itself from a pharmacy chain to an integrated provider of health services. In 2018, Aetna was acquired adding medical benefit services. HealthHubs are now being deployed across to sell health plan networks. Recently, CVS agreed to acquire Signify Health Inc. for US$8 billion which will provide 10,000 contracted doctors and clinicians to its network. This acquisition adds home care services to its offerings.  The stock currently yields 2.2 per cent. 

PAST PICKS: September 21, 2021

Alaris Equity Partners  (AD.UN TSX)

• Then: $18.22
• Now: $16.79
• Return: -8%
• Total Return: -1%

Alimentation Couche-Tard (ATD TSX)

• Then: $49.48
• Now: $57.75
• Return: 17%
• Total Return: 18%

Ag Growth International (AFN TSX)

• Then: $27.62
• Now: $35.83
• Return: 30%
• Total Return: 32%

Total Return Average: 16%