Stock Recommendations for January 2022
Hello, today is January 10th, 2022. Happy New Year!
2022 Portfolio Recommendations
We had a pretty good market for equities and real estate last year. Inflation has been running a little hotter than the central banks would like it, or the people would like it too. And this year, we are likely faced with an environment of reduced quantitative easing, or no quantitative easing by the central banks, and possibly a rising rate environment. With valuations in stocks being so high, a rising interest rate environment is not particularly good, especially for the high multiple stocks like the super high growth stocks. High growth stocks tend to be tech stocks.
What to Do About Rising Rates
A rising interest rate environment hurts bonds, hurts stocks, hurts real estate. It’s kind of hard to hide. It definitely increases volatility. So, it’s going to be a tough year to predict what happens to the market as well. Every year is tough to predict, but this this one may be even tougher. We may go through a roller coaster ride and end up at the same place that we started. It could be a bit higher, or it could be lower.
In such an environment, especially when we have still had very low rates and higher inflation, a good asset class to allocate money to is farmland. Farmland not something that’s traditionally found in retail investors’ portfolios. It’s usually the ultra high net worth family offices and some institutions that are in farmland. We have a way of investing in Canadian farmland for Canadian residents we will definitely be adding to farmland this year.
The asset class is not correlated with equities or real estate, and not correlated with interest rates when there is a highly negative real rate environment, meaning the nominal rates are much higher than the actual inflation, which is not likely to happen for the next few years, if ever. So, we feel good about that. That, plus it’s very stable. So that’s one area to add money to.
Another area that has been in increasing in focus over the last five years is climate change. It’s hard to take advantage of that directly; usually people play in this area through electric car manufacturers like Tesla and so on. But, those are super high growth stocks that tend to not do very well in a high and rising interest rate environment.
There is a new way of participating in that through carbon credit futures, and there is an ETF that was launched just over a year ago. We are adding for the first time ever, into the carbon credit asset class, if you can see it as an asset class. It’s like a commodity, or part of the commodity as an asset class I suppose, as an area that we’re adding to.
Absolute Return Strategies.
Other areas to add to are traditional absolute return type areas like private debt in an environment where higher volatility and maybe a lower return this year is expected. That’s why an asset class like private debt that has very little volatility and a decent return in the 7-8% range makes a lot of sense.
Review of January 2021’s Picks
Last year, I recommended Alerus Financial (ALRS), which was up 2.2% since this time last year. Haverty Furniture (HVT) was up about 5.9%, including dividends, since this time last year. Finally, D.R. Horton (DHI), was up 41.2%. These totals averaged 16.4%, which compares with 18.4% for the MSCI World Index ETF in US dollars, including dividends.
Today’s Stock Picks
For this year, and this month, and this year, really, three new stock picks. These picks should fit well with the current scenario of rising rates and risk volatility, as well as compression of multiple stocks.
Manulife Financial Corp. (MFC.TO)
First one is Manulife (MFC.TO), a Canadian insurer. It’s trading at a very reasonable valuation and has a very decent yield. Insurance companies tend to do well when rates rise because they can invest new premiums from insurance policies into high yielding bonds when rates go up. Manulife is a strong company with a strong balance sheet and very reasonable valuation. It has completely underperformed the market in the last five years, so we could expect for it to catch up. This should provide for a better return by the markets and a decent return, regardless, going forward.
ServisFirst Bancshares, Inc. (SFBS)
Next one is also a financial services company. This one is a bank in the US. In the US, banks do well when rates rise, unlike perhaps Canadian banks that hold a lot of their loans on their balance sheets and borrow on the short end of the curve and lend out a lot at five year loan terms and do really well when there is an upward sloping yield curve. In the US, banks tend to originate loans then sell them off, which is better in a rising interest rate environment or a flatter yield curve. One such bank that could do well over the next 12 months is ServisFirst Bancshares (SFBS). They do commercial, consumer, and other loans, accept deposits, banking, electronic banking services; all the traditional things that banks do.
Our third pick is a company called Fabrinet (FN). They provide outsourced manufacturing services to OEMs that need complex manufacturing capabilities. This is primarily technology hardware type products; we are staying away from adding to the super high multiple tech stocks, but this is not such a super high multiple stock. It’s more reasonably valued and in the hardware business rather than in the more intangible aspects of technology. So, we believe this is going to behave more like an industrial company rather than a tech company. It therefore has a chance of continuing to do well with the stock.
Have a Question About Your Portfolio?
Again, if you would like a second opinion to see whether these stocks fit in your portfolio and if it’s already well diversified or not, please give us call. Thank you.