November 2021 Stock Picks
Hello. Today is November 3rd, 2021, and it’s time for some new stock picks. As always, we’re going start by reviewing the investment recommendation stock picks from this time last year.
This time last year, we had a tech stock, Logitech (NASDAQ: LOGI), the maker of mice, computer peripherals, and other equipment like that. It’s up 3.7% since the day that we recommended it. Natural Beverage Corp. (NASDAQ: FIZZ) is up to 57.3%. Infosys (NYSE: INFY) up 58.9%.
We also recommended a bonus investment idea: natural gas. For Canadian investors we said the HUN ETF (HUN.TO) was the way to do it. HUN is up 48.3% in Canadian dollars, and as the Canadian dollar has appreciated, that percentage translates to 59.2% in US dollars. So, the average of the four recommendations is 44.8% in US dollars. That compares with the total return for the world MSCI World Index ETF of 29.3% in US dollars.
No Tech Stocks for November 2021
We are not going to have a tech stock in the top three picks today, even though this time last year we had two of them. We anticipate interest rates going up in the next 12 to 18 months, and the result of that will tend to be, perhaps, lower PE ratios for the high growth stocks. Tech stocks tend to be high growth stocks and they tend to trade at high P/E multiples. We don’t recommend getting out of tech altogether, although a neutral or slightly underweight position, 20% or thereabouts, of a total stock portfolio exposure would be appropriate.
Toronto Dominion Bank (TSE: TD)
Our first stock pick is a financial Canadian bank, TD Bank (TSE: TD), one of Canada’s largest banks. Canadian banks, I believe, are trading at lower valuation than they should be based on their fundamentals. So, they kind of need to play a little bit of catch up with the US banks and other banks around the world, valuation-wise. For example, TD Bank is trading at a P/E ratio of around 11. The return on equity for the bank is somewhere in the 13-14% range. Also, the price to book value is somewhere in the 1.75-1.8 range, and it should be closer to 2. So, it’s slightly undervalued and it has a good probability of continuing to deliver the same type of return on equity going forward. And, even without a valuation increase, it should produce double digit total returns for investors going forward. So that’s our top pick.
Comfort Systems USA (NYSE: FIX)
The next stock pick a US stock, Comfort Systems USA (NYSE: FIX). They are in the contracting services business: heating, ventilation, air conditioning, plumbing, and piping for construction or commercial or industrial buildings. They cater to those sort of buildings whether they are newly constructed or for maintenance services. The company is doing well, the stock is doing well, and the valuation is reasonable. We additionally expect continuing demand for their services going forward. Therefore, we expect good company performance and stock performance for the next year and beyond.
Barrick Gold (TSE: ABX)
The third pick is a gold miner, Barrick Gold (TSE: ABX). Gold miners are a little bit hard to value. Traditionally, we have stayed away from mining companies, including gold miners. However, that is because the underlying commodity is used by the market as a substitute for cash, bonds, and for other types of investments.
Gold is being used as a reserve by central banks and is used by investors to keep up with inflation as an inflation hedge for their portfolios. Gold tends to be zero correlated or uncorrelated with with equities and gold miners have to have a lower correlation with other equities. In the past, investors have required a lower rate of return from the gold miners than from the rest of the stocks because of their low correlation to the remaining portfolio. So, with lower expected returns in the region of like 4 or 5%, we weren’t interested in those types of investments, especially since they can be quite volatile.
Changing Our Mind
We believe, now, that the expected return from miners like Barrick is going to be closer to 10%, perhaps even double digits, even without gold prices going up. The valuation on miners, and this one in particular, is somewhat attractive, trading at roughly 1.4x book value with a return on equity in the 10-12% range. We expect a high single digit return going forward, assuming no changes in the price of the commodity, and that it should make for a reasonable investment going forward.
Need a Second Opinion?
If you’d like a second opinion as to whether or how they fit in your existing portfolio, please give us a call. Thank you.