Lorne Steinberg, President, Lorne Steinberg Wealth Management

Focus: Global value stocks and high yield bonds

Top picks: Universal Music Group, Unilever, Nike

MARKET OUTLOOK:

To say that markets have been climbing the so-called “wall of worry” is an understatement. Markets have been on an upswing, despite the implementation of tariffs, as there has not yet been a major impact on consumers, while inflation has remained under control.

However, if U.S. consumers experience too much pain, we would anticipate that tariff policy would evolve, especially as we approach the mid-term elections. While tariffs are a negative, the significant increase in corporate capital expenditure budgets are a major positive. The largest tech companies have announced US$350 to $400 billion in spending in the near-term, mainly due to investments in AI, while many other companies have been bringing some production back to the U.S., providing an additional boost.

Despite the uncertainty, most large corporations have been able to adjust to this volatile environment, as evidenced by solid earnings growth thus far, and we anticipate continued strong profit growth for the balance of this year.

Although most global stock markets have lagged the U.S., investors should not ignore compelling values elsewhere. The tariffs have been a wakeup call for many regions, including the EU, and we anticipate that policy changes there should result in increased capital investment, enhanced productivity and renewed investor interest.

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TOP PICKS:

Universal Music Group NV (UMG Euronext NV)

UMG is the global leader in music, both recorded and publishing with more than 50 labels. It is home to many of the greatest selling artists of all-time (The Beatles, the Rolling Stones, U2 and Lady Gaga, to name a few). Streaming and subscription services now account for the vast majority of revenues.

There are only three major players in this business and UMG is 50 per cent larger than the next largest competitor. This business has healthy profit margins and strong growth which should translate into rising profits and free cash flow for years to come. The shift to streaming has increased the monetization of music, and UMG is the major beneficiary.

Also, UMG is expanding its partnerships into social media, gaming, health and fitness. The company has raised royalties with Spotify and others which will boost profits going forward.

Finally, the company is preparing to list its shares in the U.S. which should boost visibility. We expect this company to increase earnings at over 10 per cent annually for the next several years, making this a compelling opportunity.

Unilever PLC (UL NYSE)

Unilever is a food and consumer goods giant, with a global footprint that spans 190 countries, with market leading brands in beauty and well being (Dove, Vaseline), foods (Hellman’s, Knorr), ice cream (Ben & Jerry’s), and home care (Sunlight). Under new management, the company has returned to growth, and we expect margin expansion and increased revenues to drive earnings higher over the next few years.

The company is allocating its significant free cash flow toward dividends and share repurchase. At a price-earnings ratio (P/E) of 17 with a 3.3 per cent dividend yield, the shares offer outstanding value for a best-in-class company.

Nike (NKE NYSE)

Nike is one of the world’s best known brands and is the global leader in both athletic footwear and sportswear. This company has had an impressive track record of organic growth, driven by product development and strong marketing and distribution.

The company stumbled under its previous CEO, and growth stalled. New management has already made major strides in reinvigorating investment in new products, clearing out channel inventory, and leveraging the global brand.

Over the next year, we anticipate revenue growth and expanding margins will result in sharply increased earnings. The company has minimal debt and generates significant free cash flow which has been used for dividend increases and share buybacks. Investors today have the chance to buy an iconic consumer brand at a very cheap price.

PAST PICKS: JUNE 27, 2024

Walt Disney (DIS NYSE)

Then: US$102.17

Now: US$119.35

Return: 17%

Total Return: 18%

Cisco Systems (CSCO NASD)

Then: US$47.45

Now: US$68.49

Return: 44%

Total Return: 49%

Yamaha Corporation (7951 TYO)

Then: ¥3786.00

Now: ¥983.60

Return: -22%

Total Return: -20%

Total Return Average: 16%