July 2022 Stock Recommendations
Hello. Today is July 7, 2022, and it’s time for a new stock pick article. As always, I will give a review of the performance of the picks from this time last year and then move on to some new recommendations.
July 2021 Picks
This time last year I picked the Peyto Exploration & Development Company (TSE: PEY), which is an oil and gas stock. It was up 36.8%. Then I picked CIBC Bank (TSE: CM), which was down 11.9% including dividends. My final pick from July 2021 was Information Services Corp. (TSE: ISV), down 33.4%. These picks performed for an average of -2.8% in US dollars, including dividends. This compares with the MSCI World Equity Index (URTH) in US dollars, which was down 14.5%.
Today’s Recommendations
A lot of things have changed in the last three weeks or so. The stock market more or less continued to go down slowly. But, the biggest difference was that commodity prices, starting with copper, went down a fair bit. Copper is probably the single best indicator of current and future economic activity. The price of copper is down year over year around 17%, which is rather significant, and down from the highest earlier this year about 25%. That’s good news and bad news at the same time.
The good news is that the inflation that has been raging for the last year or so is likely to be going down slowly over the next few months. Inflation has been a problem for investors, consumers, businesses… Everyone. However, with lower inflation we get lower interest rates which support higher asset prices, such as bond prices, stock prices and real estate prices.
The bad news is the likely reason prices for commodities like copper and oil have come down is that investors are anticipating a recession. It’s “the cure for high prices is high prices” idea. That also possibly means rates won’t have to go up as much as we expected as late as two or three weeks ago. So things changed a fair bit recently. Recessions, negative economic growth, usually come with lower profits for corporations so while we can have higher P in stock P/E ratios due to lower rates (P for Price, E for Earnings) but lower E due to the economic environment. Difficult investment environment…
What Do We Do Now?
With a recession being a very likely scenario, a good idea may be to own some “recession-proof” or “recession-resistant” stocks. Since three weeks ago, the markets and investors are generally less likely to predict stagflation as a scenario, but it’s still a possibility. There’s also the possibility of returning back to regular growth with less inflation, which would be a good type of environment for investing. So investments that work under that scenario have to be a big part of the portfolio.
Novartis (NYSE: NVS)
Given the above possibilities, my first pick for today is Novartis, (NYSE: NVS). They are a pharmaceutical company. Very strong profitability, stable profitability and the valuation is reasonable. In fact, it’s a little bit lower than it has been on average for the last 10 years or so. Normally, people don’t cut on their prescription medications, even in bad times. So we expect the company to be able to continue to perform well.
With this stock we are getting a good quality company, a decent dividend that’s higher than the dividend of the 10 year bond yield, a strong balance sheet, good valuation and lower beta stock (the stock is not as volatile as the market). These are things that can make investors sleep better at night knowing that their investments, even in this stock market, are a little bit more safe than the net general stock out there. Therefore, it should do well long-term.
Royal Bank (TSE: RY)
Since starting these stock recommendation articles, I’ve done at least 75 stock picks and a few bonus picks over that time. For the first time in 25 articles, I’m recommending a stock for the second time. I picked it for the first time last August. The reason for this double-recommendation is it’s a good quality stock. It’s one that you can hold for a very, very long time and expect it to work and compound returns fairly well. It is the one and only Royal Bank of Canada (TSE: RY).
This pick exists in a lot of people’s portfolios already and there’s a good reason why it should be part of most people’s portfolios. Banks are not recession proof, so we don’t expect that even a bank like Royal Bank that has a very high quality long portfolio will be able to withstand the recession. But we don’t own stocks just for three months or six months – you want stocks for the long term.
Over the many business cycles that Royal Bank has operated under, it’s been able to do fairly well and we expect that to continue to be the case. The return on equity is very good, stability is very good, and valuation is pretty good, too. That means it should be a long term pick especially for Canadians, as the dividend is treated preferentially for taxes in non-registered accounts.
ConocoPhillips (NYSE: COP)
My next top pick is going to be one that’s going to work in a stagflation-type environment and in a growth environment, as well. Not so well during a recession, probably. That’s ConocoPhillips (NYSE: COP). It’s a US-based energy, oil and gas company. Again, good balance sheet, has good valuation, good dividend, but subject obviously to the gyrations of oil prices. This pick is more volatile than my rest of the picks, but it’s something to have as a hedge against inflation. We don’t expect as much inflation now as we did before, so that’s needed to be said. Inflation should be coming down.
Kellogg (NYSE: K)
I have one bonus pick this time around that is more on the recession-resistant type of stock. It’s a consumer staple, Kellogg (NYSE: K) the cereal manufacturer. Very strong profitability, strong balance sheet, good dividend, valuation is still good despite the fact that it’s actually up year to date when the markets are down. The valuation is still good and the total return on Kellogg over the last 10 years has been about 7%. Meanwhile, the profitability of the company, return on equity, has been very, very high. The business has performed extremely well.
Perhaps it has underperformed what the expectations were and definitely underperformed the US market as investors during the last 10 years chose to chase the other other sort of businesses like tech stocks and other growth stocks. It could be the time for stocks like Kellogg to shine. Even if it isn’t, longer term it’s still a very good business and the price is good. Therefore, it’s good to buy and hold it to generate wealth for you as an investment in time.
What Do You Think?
As always, if you’d like a second opinion as to whether these stocks fit into your portfolio, or an opinion on your current holdings in your portfolio, please give us a call. Thank you.
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