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Stock Picks for January 2024

Today is January 11th 2024. Happy New Year!

It’s time for a new stock pick video. A always I’ll review the performance of my picks from this time last year and give a synopsis of current market and economic conditions as I see them and proceed with uh some new stock picks and the rationale behind them.

This time last year I picked Skyworks (SWKS), a technology company. The stock was up 5.9%. I also picked Freeport McMorran (FCX), the copper mining company. The stock was down 6.5%.  My third pick was Tourmaline (TOU) the Canadian Oil and Gas Company. That stock was up 1.5%. So on average, my picks were up 0.3%, in US dollars including dividends. In comparison the MSCI World Equity Index, as represented by the URTH ETF was up 17.7%.

Economic Outlook

Last year I was conservative with my my picks I continue to remain conservative because I believe the economy, both in Canada the US, and actually the rest of the world is slowing down.  As a result of tighter monetary policy, substantially tighter monetary policy actually. We had an unprecedented amount of monetary stimulus after the covid lockdowns in 2020 and then in 2021 which continued into 2022. That stimulus was being removed through 2023. Normally, a slowdown would have happened by now. I think what kept the economy and the stock market afloat was the massive deficit spending by the US government. Substantial deficit spending to in the region of  7% or more as a percent of GDP.  The US economy grew by 5.8% (nominal, not inflation-adjusted GDP) in 2023. Therefore all of the the growth in the US economy plus more was due to deficit spending. Without that the US economy would have been in recession. The rest of the world almost for sure in recession.

Going forward the situation is similar right now with key economic indicators deteriorating faster than people would like. Indicators like the used car market in North America. It is not doing very well.  People borrow to buy their cars  and interest rates are much higher than they used to be. Around 10% now for car loans versus 5% a year ago 18 months ago. The real estate market, primarily the commercial real estate market for offices in the US first and now possibly the residential real estate market as well, especially Canada, Australia and the UK where  people buy homes using variable rate mortgages or, in Canada, 5-year term mortgages. In the US, people lock in 30 year term mortgages so their rates are fixed for quite a period of time. Therefore, the US economy is not as sensitive to interest rates as the rest of the world. This is a good thing for the US. If we end up with a recession in 2024 or 2025 we are probably going to see a bear market for stocks. In my mind the odds are at about 60% chance for a recession, so my picks for the next 12 months and beyond are going to be a mix of Consumer Staples for defence and other good companies that could perform well for the longer term even if they don’t perform well in the first 12 months or so.

Unilever (NYSE:UL)

Stock pick number 1 is going to be Unilever (NYSE:UL). The consumer goods company. They have personal care, home care, packaged food, brands like Knorr soups, Hellmann’s mayonnaise, Axe and Dove skin products, hair products and whole bunch of other ones. Obviously, that’s a massive company. The products they make tend to be the last consumers will cut spending on, so they tend to do well regardless of economic conditions. Last year, investors were chasing growth stocks and more cyclical stocks and they ignored the consumer staple sector. As a result, the stock was actually flat to a little bit down over the last 12 months when world equity markets were up around 20%. This valuation gap that opened up I think creates an opportunity to get into a high quality company, high quality in that has consistent and high
profitability, at a better price so that’s always a good thing. So that’s stock pick number 1.

Skyworks Solutions (NASDAQ:SWKS)

Stock Pick number two is going to be my top pick from this time last year: Skywork Solutions (NASDAQ:SWKS). The company continues to do well. It’s a semiconductor company with semiconductors used for wireless handsets and other such devices. The business is cyclical and as a result the revenue and earnings did slow down a bit in the last year versus the previous previous year. However, the valuation on this stock is such that I think the stock could do well while the company doesn’t necessarily perform as well in the next year or two in a slower economy. The stock has already priced most of that in so the stock could end up doing well. It’s just a case of the company doing one thing and the stock doing another. Over the long term those two go together but on a shorter term basis like a year or two the performance of the stock versus performance of the company can deviate. This is where I believe the stock is pricing in the slowdown already and we’re getting it at a good price so we can get in ahead of the actual slowdown happening. We’ll see if that works in a year from now or and if we end up holding it for longer.  That’s a great thing because this is a very high quality company and they the valuation is pretty reasonable. We are buying the stock at the forward PE ratio of 14 and a half times when the market trades at around 20 times.

Ternium (NYSE:TX)

Stock pick number 3 is a steel  company by the name of Ternium (NYSE:TX). Steel companies fortunes’ are tied to the economy and they tend to go up and down with the economy. However, I believe, part of that huge deficit spending the US is incurring is going towards infrastructure spending. With infrastructure spending while the general economy may be slowing down, if there is enough money being spent on infrastructure, there could be enough demand for steel products. The valuation of this stock is good so we could have the stock do
well regardless of what the economy does. This is an unusual situation because again as I said before usually these companies don’t do well in
recessions.

Give Us a Call

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!

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