Stock Picks for November 2023
Today is November 10, 2023 and it’s time for our new stock picks! As always, I’ll review the performance of my picks from this time last year, offer a little bit of analysis on current market and economic conditions and proceed with some new stock picks and the rationale behind them.
This time last year, I picked 3M, the multinational conglomerate that makes 60,000 different products ranging from Post-It notes, to adhesives, abrasives, window films, paint protection films, dental and orthodontic products, and more. The stock was down 21.8%. I also picked Manulife Financial, Canada’s largest insurance company. The stock was up 19.7% and Michelin, the French tire manufacturer, the stock was up 21.5%. The average of those three was 6.5%. That’s in U.S. dollars including dividends. That compares with 16.8% for the performance of the MSCI World Equity Index as represented by the URTH ETF, again in U.S. dollars, including dividends.
Our picks did not outperform the market this time. We were positioned (and still are) for a potential recession. And the result was this underperformance, however, historically we beat the market about 68% of the time 12 months out and the picks on average do about 4.2% better than the market.
I already mentioned we are expecting a possibility of a recession and in my mind, the odds of a recession globally, in the US and Canada are about 60%. In a recession, typically equities are going to bear market with stocks dropping as much as 30% on average before recovering and then making new highs within three years. I believe we may be in the situation again, with about 60% chance of that happening. There’s probably a 30% chance of slower growth and no recession. I believe this is what markets are pricing in at the moment. The remaining 10% probability is for the scenario of higher growth and inflation. This high inflation scenario is particularly bad for western governments that have borrowed tremendously in the last 3-4 years and will have an out of control debt spiral as they will have a hard time making the interest payments on these debts on tax receipts alone.
The consensus outlook may be a little bit different than what I expect. It’s for a lower probability for a recession and higher probability of a soft landing. There are a number of reasons why I think the odds for a recession are higher than what other analysts are expecting: Interest rates having moved much higher over the last 16 months and the yield curve being inverted. Only 1 out of the last 11 times this happened did the economy escape a recession. Additionally, the Canadian, Australian and UK economies are very sensitive to interest rates, with interest rate only and adjustable rate mortgages, interest costs for consumers have skyrocketed, so there’s a lot less money left over for consumption or savings / investments. On the other hand, the US government is expected to continue its massive deficit spending, ameliorating the negative impact of the interest rate situation.
Equity Valuations and Stock Prices Going Forward
The US economy is less sensitive to interest rates as consumers’ largest loans, their mortgages, usually have fixed rates for 30 years. Many locked in low rates in 2020-22 so they won’t be worried as much about rates having gone higher. Also, many investors being US based, are probably experiencing home country bias, if you will: I believe they don’t understand quite how interest rate sensitive other economies are. So stock valuations are perhaps higher than what they should be if the economy is going to slow down. Analysts are expecting 10%+ growth in earnings for S&P500 companies (large US companies). This is not likely to happen if we have a recession. We are therefore positioning again for playing a little bit of defense with our stocks for the next year. And for that reason, our first pick is going to be a utility company.
Today’s Stock Picks
There are many good utility companies in the US in Canada, but our first stock pick is a European one; ENDESA, symbol ELEZY. They are a power utility company in Spain and Portugal. They have hydro, nuclear, coal, natural gas, oil, solar and wind. Why do we like this particular utility? The stock yields 8.6%. So that’s pretty much the return we expect from the stock. We don’t expect the stock price to go anywhere, but in an environment where there’s a possibility of negative returns for stocks on average for next year, getting eight to 8-9% returns is pretty good.
British American Tobacco (NYSE:BTI)
Same idea with the next stock pick. British American Tobacco, symbol BTI. One of the largest tobacco companies in the world, neck and neck with Philip Morris as to who’s the largest. They own brands like Lucky Strike, Rothmans, Camel in the US. Not the best business to be in obviously but the valuation of the stock is so attractive that it could give us a decent return from this price point. The dividend yield on this stock is about 9%, so again, we don’t need the company’s sales to grow or even stay the same, just not decline too much and we going to make a decent return from it without taking on a lot of risk.
The third stock is not a defensive stock. It’s in the cyclical automotive business. However the valuation on it is attractive enough that we could have a recession this stock could end up doing well. Perhaps a recession is already priced in. It’s Mercedes Benz group. Symbol MGBYY. They trailing 12 month Price to Earnings ratio is only 4. In contrast the S&P500 is trading at a P/E ratio of about 20!. The dividend yield on this stock is 9.5%. Price to book is only 0.67, meaning it’s trading at 67%, the cost of putting this business together. This may be close to the liquidation value of the company. We are getting a discount on every single metric, the market is probably thinking that they are going to eventually go out of business and there’s only going to be one automaker left in the world, which is going to be Tesla. That is possible, but right now because the valuation is so particularly attractive, we’re going to take a chance on this, even in a possibly weakening economic environment. Perhaps the buyers of the products are less economically sensitive than your typical consumer and they don’t need low rate financing and all that.
Give Us a Call
As always, if you have any questions as to whether these stocks fit your portfolio or any other investment questions, please don’t hesitate to give us a call. Thanks, have a great day and a great long weekend. Happy Remembrance Day!