Market Call

David Driscoll's Top Picks: July 2, 2024

David Driscoll, president and CEO, Liberty International Investment Management

FOCUS: Global stocks 


MARKET OUTLOOK:

The markets are currently priced to perfection. If a company misses either or both of its revenues or profits, its stock price can plummet 10 per cent or more in one day. This is, indeed, a momentum-based market.

Economic growth has weakened because consumer spending – about two-thirds of gross domestic product (GDP) – has fallen. Consumers must allocate more of their take-home pay toward debt repayment, not on “stuff.” Also, food and gasoline prices have risen well above the inflation rate, further tightening consumers’ belts. Wage growth is not keeping pace.

Higher short-term rates have caused companies to pause long-term investments. Investment grade companies rated AAA to BBB are paying five to six per cent to borrow. Small-cap companies are paying considerably more. Operating margins have weakened because of higher interest expenses, leading to weaker profit growth.

As of this writing, the Russell 2000 Index of small-cap stocks is down 0.1 per cent this year. U.S. economic growth comes from small businesses. This is not a great sign. European indexes have fallen recently because of elections where a move farther to the right has upset investors. The Canadian dollar versus the U.S. dollar is weaker because the U.S. has 1.25 per cent higher interest rates and because U.S. growth is better than Canada’s. If the Bank of Canada keeps cutting and the U.S. Federal Reserve doesn’t move, the Canadian dollar should weaken further.

If economies weaken further, the central banks may be forced to lower interest rates to spur economic growth. If the stock market corrects, dividend income helps to cushion the blow. In the long term (10-20 years), dividend growth is the key to make better returns. Since 2000, regular country indexes (up nine per cent) beat the Nasdaq (up six per cent) because tech stocks are growth stocks where most don’t pay dividends. The difference in performance is thanks to dividend growth.

Trading in tech stocks should be disciplined. If investors double their money, they should sell half to pay for their investment. Compared to the rest of the stock market, tech stocks are almost twice as volatile or risky today. People forget that Nvidia’s share price fell 70 per cent in 2022.

A non-correlated, diversified portfolio of dividend-growing stocks wins in the long run.

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TOP PICKS:

David Driscoll's Top Picks

David Driscoll, president and CEO at Liberty International Investment Management, discusses his top picks: Carl Zeiss Meditec, Enghouse Systems, and Spectris plc. David Driscoll, president and CEO at Liberty International Investment Management, discusses his top picks: Carl Zeiss Meditec, Enghouse...

CARL ZEISS MEDITEC  (AFX GERMANY)

The company operates through two business units: Ophthalmic Devices (about 75 per cent of revenues) which makes microscopes, laser surgery equipment, and lenses. It also makes mirrors for ASML Holdings, a leading manufacturer of semiconductor equipment. Its other business is Microsurgery (about eight per cent of revenues) which makes surgical microscopes for ear, nose and throat surgeries.

The company’s outlook was recently reduced because of softness in China sales and weaker demand for medical devices in North America. However, the company’s shares have fallen so much that it trades at 13.7 times 2026 expected earnings. It has twice as much working capital compared to total liabilities, has a debt-to-cash flow ratio of only 1.5 times, has a return on invested capital (ROIC) greater than its cost of capital and a PEG ratio (price-to-earnings growth) of 1.0.

ENGHOUSE SYSTEMS (ENGH CN)

The company is a software firm that has two businesses. Its Interactive Management Group provides interactive phone systems for banks, insurance companies, utilities, healthcare providers, high-tech and hospitality companies. Its asset management group develops geographic information systems (GIS) tracking software like RFID or barcode tracking used primarily for spatial asset management applications to the energy, telecommunications and utility industries.

The company has now become a SaaS company. Instead of selling the software, it offers companies to subscribe and pay an annual fee to access the software. This has helped improve margins and, in turn, profits. An indication of profit growth is the growth in the dividend which was raised 18 per cent for 2024. The company trades at 18 times 2026 expected earnings, offers a 3.5 per cent dividend yield, very little debt and a 15 per cent return on invested capital, well above its cost of capital.

SPECTRIS plc (SXS LONDON)

The company makes precision measurement equipment. It has two businesses. Spectris Scientific is a leader in advanced measurement techniques for materials analysis with its key markets being pharmaceutical, semiconductor, primary and advanced materials and advanced research. Spectris Dynamics is a global leader in advanced virtual and physical testing and high-precision sensing solutions.

The company announced a weaker outlook for this fiscal year and the stock fell from 38 GBP to its current price of around 27 GBP. Fundamentally, it trades at 12.7 times 2026 expected earnings with little debt and almost two times working capital to total liabilities.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
AFX-GERMANY Y Y Y
ENGH TSX Y Y Y
SXS - LONDON Y Y Y

 

PAST PICKS: DECEMBER 19, 2023

David Driscoll's Past Picks

David Driscoll, president and CEO at Liberty International Investment Management, discusses his past picks: Cogeco Communications, Atrion Corp., and Jardine Matheson Holdings.

COGECO COMMUNICATIONS (CCA TSX)

  • Then: $55.77
  • Now: $51.24
  • Return: -8%
  • Total Return: -5%

ATRION CORP (ATRI NASD)

  • Then: US$350.53
  • Now: US$451.99
  • Return: 29%
  • Total Return: 30%

JARDINE MATHESON HOLDINGS (JM SP)

  • Then: SP$39.78
  • Now: SP$34.29
  • Return: -14%
  • Total Return: -10%

Total Return Average: 5%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CCA TSX Y Y Y
ATRI NASD Y Y Y
LM - SINGAPORE Y Y Y