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Stock Picks for December 2023

Hello, Today is December 14, 2023 and it’s time for some new stock pics. These will the last picks of the year so these stocks are going to primarily be picks that I’m going to have for 2024 and beyond that for the longer term.

As always, I will review the performance of my picks from this time last year and give a little bit of an analysis of current economic and market conditions and give you my stock picks based on where I think the economy and markets are going, with the underlying fundamentals in mind as well when picking the stocks which tend to be more important in the long run.

Performance Review

At this time last year, I picked our RLI Corp, (NYSE:RLI), an insurance company. The stock was up 6% since this time last year, including dividends. I also picked Tricon Residential, (NYSE:TCN), a real estate operator of primarily residential rental properties. The stock was up 11.4%. I also picked Celanese, (NYSE:CE), an industrial company and that stock was up 46.9% for an average of 21.4% in U.S. dollars, including dividends. This compares with 18.5% for the performance of the MSCI World in U.S. dollars, as represented by the URTH ETF, including dividends.

The returns for 2023 for the benchmark and my picks exceeded my expectations. In fact, I was only expecting single digit returns and my picks were generally a little bit more conservative throughout the year. That did not materialize. The markets have had a good year especially the U.S. market and international markets, less so the Canadian market. “Growth” outperformed “value” by quite a large margin. I believe the reason for that is the massive deficit spending, especially by the U.S. government. They had deficit spending somewhere in the region of 8% of GDP. With their nominal GDP growing around 5.5% (real, inflation adjusted 2.5%), all of that growth and more was attributed to the their deficit spending. That kept both the economy and the markets afloat in the U.S. and globally as well.

Recession Ahead?

Looking head for the next 12 months, at some point that kind of spending will subside, especially after the U.S. elections if the Republicans get voted in… Then the economy will have to stand on its own two legs. If this is going to be the case, the outlook will be a little bit gloomy, just like our weather here in Vancouver today, it’s all cloudy and dark! The Conference Board are forecasting negative real GDP growth for the US economy for the first and second quarter of 2024, which technically will be a recession, we’ll see. 

With a possible recession in 2024, I am going to be conservative with my stock picks. Two consumer staples stocks, in case we have a recession in the U.S. or the rest of the world, and one that could be considered an attacking play, in case we don’t, in line with my assessment of the probability of a recession being around 60%.

Today’s Stock Picks

Koninklijke Ahold Delhaize NV

My first pick is one that I’ve picked before, a grocery store chain operating in many different countries but primarily in the US even though they’re headquartered in Holland. Koninklijke Ahold Delhaize, (OTC:ADRNY). Their grocery chains are all over Europe and the US. It’s a really big company. And the idea with that sort of company is that their profitability doesn’t really change much depending on economic conditions. People need groceries no matter what. Whether inflation is high or low, the economy is good or bad, business is fairly stable. The main issue there is what price you have to pay for the stock. Is the price good or is the price not so good. As it so happens, in the last three or four months , the stock underperformed the market. This is a good thing because we want to buy it at a lower price.  Investors are currently mostly focusing on growth. They’re very optimistic at the moment. So that gives us an opportunity to buy a consumer staple company at the at a good price, which doesn’t happen very often. That’s stock pick number one.

Imperial Brands

Stock pick number two is Imperial Brands (OTC:IMBBY), the fourth largest international tobacco company. Again, a very stable business. As a mature business, there is no growth there. But still, the company generated revenue in the last 12 months of approximately $200 billion, from tobacco. As bad as it is, people are still buying it and this company is making very good and stable profits. Return on equity for the last 12 years was consistently over 20%.

While the stock is not necessarily cheap, it is cheap enough for us to be interested in it. It has a very good dividend with a yield of 7.1%. Because there is no real growth in these businesses, they’re buying back stock. They’re buying back an additional 5% as net buyback yield on top of the dividends. It’s quite possible that we could get a 12% return longer term from the stock and we don’t have to worry about the economy being good or bad for the next year or so. This is not a long term hold. We will get out of it at some point, ideally after a market selloff as other stocks could go down way more than this one.

Komatsu Ltd

The next pick is an industrial company, the attacking pick. A Japanese equipment manufacturer by the name of Komatsu, symbol KMTUY. They make construction equipment to be used primarily in the construction, mining and utility businesses. The mining business in particular is experiencing secular growth. That’s due to the demand for electric vehicles, batteries, a lot of minerals required for for these batteries and the mining business is expected to grow tremendously over the next 10 plus years. So they’re gonna need the equipment to use and this company can make this sort of the equipment.

The profitability of this company is reasonable, although it is not as good as that of the tobacco company: its return on equity is around 10 to 12%. The valuation is obviously lower, but surprisingly enough even though this is an industrial sort of business, the company’s profitability has been very stable through recessions in the past, which is why it is our stock pick number three.

Give Us a Call and Happy Holidays

As always, if you have a question on these stocks or any other investments, please do not hesitate to give us a call. Thank you have a great day and great holidays and happy 2024!

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