Michael Sprung, President of Sprung Investment Management
Focus: Large stocks in North America
The volatile markets are likely to continue for some time. The pandemic has highlighted the fragility of global supply chains and placed a new focus on the need for secure sources of supplies. The shortage of necessary materials and components was already reflecting on inflation when the war in Ukraine added fuel to the fire of inflation, particularly in energy and food. All this happened after a period of unprecedented government spending and massive accumulation of government, business and personal debt in an environment of extremely low interest rates.
Central banks have responded to rising inflation by rapidly increasing interest rates in order to stifle demand as there is little that can be done to correct supply imbalances. Industry and supply chain restructuring is a long-term issue that may take many years to implement. Debt burdens reflect past consumption at the expense of that in the future. Future economic growth and expansion will be constrained in this environment. Investors will need to look for companies with strong financial positions that can withstand this shift. Firms that can pass increased costs more easily and have manageable debt repayment profiles will have more advantage than those that have large capital requirements with the potential for profitability far into the future.
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Last purchase March 2020 $77.25
CM is the fourth largest bank in Canada. After the recent purchase of PrivateBancorp Inc. Nearly 20 percent of profits now come in the United States. Over the next few years, management intends to increase US profits to nearly 25 percent of the total. In the current environment, we expect the Bank’s focus to be on organic growth and expense controls. CM has been proactive in building reserves against potential credit issues as interest rates rise. Net interest margins are expected to increase. At current levels, the stock is trading at a lower price-to-book ratio than the six major banks, and the dividend yield is 5.2 percent.
Last purchase in June 2022 $67.72
CNQ is Canada’s largest producer with operations in Western Canada, the North Sea and West Africa. With its diversified asset base and industry leading cost structure, the company is well positioned to prosper in the future. CNQ has a strong balance sheet as debt has been significantly reduced. Once the debt is below $8 billion, share buybacks and dividends are expected to increase. At current levels, the dividend yield is 4.2 percent. CNQ is in an envious position on its ability to fund sustainable capital and dividends if WTI drops to mid-$30, currently $85.73.
Last purchase in October 2021 $86.05
CVS is the largest healthcare company in the United States by revenue. Over the years, CVS has transformed itself from a chain of pharmacies into a full-fledged health services provider. In 2018, Aetna was acquired by adding Medicaid Benefit Services. HealthHubs is now being deployed across the sale of health plan networks. Recently, CVS agreed to acquire Signify Health Inc. for $8 billion which will provide 10,000 physicians and contract physicians to its network. This acquisition adds home care services to its offering. The stock is currently producing 2.2 percent.
Previous Picks: Sep 21, 2021
Alaris Equity Partners (AD.UN TSX)
- Then: $18.22
- Now: $16.79
- Yield: -8%
- Total Return: -1%
Food Couch-Tard (ATD TSX)
- Then: $49.48
- Now: $57.75
- Yield: 17%
- Total Return: 18%
Ag Growth International (AFN TSX)
- Then: $27.62
- Now: $35.83
- Yield: 30%
- Total Return: 32%
Average total return: 16%
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