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February 2023 Stock Picks

Hello. Today is February 9, 2023, and it’s time for some new stock picks. As always, I’ll review the performance of the picks I made this time last year, review the economic environment and market conditions and then proceed with some new stock picks and rationales.

February 2022

This time last year, I picked Great West Life (TSE:GWO), the insurance company. The stock was down 15.3% in US dollars, including dividends. Imperial Oil (TSE:IMO), the energy company. That stock was up 22.1%, including dividends. And Clearfield (NASDAQ:CLFD), an industrial company, that was up 1.6%, for an average of 2.8%, which compares very nicely against the performance of the MSCI World Index, as represented by the (URTH) ETF, which was down 8.8% in US dollars, including dividends.

Today’s Markets

This year, everybody should know by now, because it’s been talked about for months on end, we’re likely going to have a recession. Multiple reasons: main one being interest rates are a lot higher than they were this time last year. Mortgage rates are in the 6% area, compared to perhaps 2% this time last year. As a result, mortgages, home equity loans, car loans, credit card balances, everything is more expensive yet incomes are not up nearly as much as they would have to be to keep the same level of demand. Demand for loans should be down given the higher rates.

In addition, we have what’s called an inverted yield curve where the three month rate in the US is around 4.7% and the 10 year rate for the government of the US to borrow is at 3.6%. So, the short term rate is higher than the longer term rate, which is very unusual. That causes banks to want to lend less because they tend to borrow overnight in the short term and lend out in fixed terms for let’s say, five years. So that reduces the money supply and then it reduces aggregate demand for all goods and services. As well telegraphed as this recession is, it doesn’t look like we’ll be able to avoid it, but maybe it won’t be as bad. So we’ll see.

Investor Decisions

Under that scenario, we as investors usually like to overweight the most stable businesses that are not affected by economic slowdowns as much. Stable businesses might include things like utilities, healthcare companies, consumer staples, grocery stores, dollar stores, etc.

Because this has been such a well telegraphed recession, I believe the market has already priced those stocks appropriately. So the opportunity may not there any more. And I believe there are better opportunities in more economically sensitive companies even though they will not do as well during a recession. But the stock prices are low enough for us to be investing there instead.

Today’s Stock Picks

The three picks that I have today have follow similar theme. They are economically sensitive companies, but the stocks are, in my estimation, trading at 30 to 35% below where they should be. There is a good 50% upside or so, but that’s only if they go to their fair value. And it may not happen in the first year due to the fact that if revenue and earnings slow down, the stocks will likely not move up. However, in a two to five year hold as markets reprice themselves, these stocks should do well.

Rio Tinto (ASX: RIO)

First stock pick is Rio Tinto (ASX: RIO).One of the largest global diversified miners. Again, these sort of businesses tend to be very tied to the economy. But, the stock price is very reasonable. Additionally, we have more of a long term increase in demand for minerals from the electrification of vehicles primarily in production of electric cars. A lot more minerals are required than a typical gasoline or diesel cars: for batteries and other electric components we need copper, nickel, lithium, cobalt, etc. A lot of minerals. So the sector is likely to do well. And this is the largest company. So it’s an easier way to participate in the market, holding a big, large, diversified one.

SilverCrest Asset Management (NASDAQ: SAMG)

Second pick is a wealth management company called SilverCrest Asset Management (NASDAQ: SAMG). They are in a similar business to ours, in wealth management, providing financial advisory services to ultra high net worth individuals, institutional investors, traditional strategies, equities, fixed income, cash, hedge funds, private equity, real estate, commodities, the whole gamut.

Again, this sort of business generally does well when the markets do well. So if we have a bad year in the markets, this sort of stock is likely to not do well. But because it’s priced well, it has something like a 30% in my estimation of margin of safety. That means we have a lot of downside protection. Or looking at it differently, a good upside potential to when it reaches its fair value.

Valero Energy (NYSE: VLO)

The third stock pick I have for today is Valero Energy (NYSE: VLO). This is one of the largest refineries in the world. We still need gasoline, diesel, ethanol and more things that companies like Valero refine despite the growing demand in electric vehicles.

The stock appears to be very cheap. I say appears because, with an economic slowdown, it may get cheaper if more of its fortunes turn around for the worse. Hopefully we will have a soft landing, as they say, with an economic slowdown but not a massive economic slowdown. The stock should do well particularly because it’s undervalued.

Questions About Your Portfolio?

As always, if you’d like a second opinion on whether these stocks fit in or in your already well-diversified portfolio or if you have any other questions, please don’t hesitate to give us a call. Thank you and have a great day.

Constantine Lycos
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