Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs 

MARKET OUTLOOK:

After five consecutive months of very solid gains for equities, stocks have wavered somewhat in April. Notably, the technology and real estate sectors have been hit hardest by the pullback. With the S&P 500 Index down about 4.5 per cent from its late-March highs, it is important to remind investors that market volatility is an intrinsic and normal aspect of investing in equities. Historical data dating back to 1928 indicates that, on average, the S&P 500 Index experiences three pullbacks of five per cent or more and more than one correction of 10 per cent in a typical year.

At The Stan Wong Group, our outlook for equity markets remains optimistic as we progress through the year. Forecasts indicate healthy corporate earnings growth in the U.S., expected to exceed 6.5 per cent in 2024 and surpass 14 per cent in 2025. Notably, market breadth for equities continues to hold steady, with more than 65 per cent of constituents in the S&P 500 Index still trading above their respective 200-day moving averages. Moreover, market participation has broadened beyond the technology and communications sectors, contributing to improved relative price appreciation across other sectors. However, in the near term, we continue to advise a slightly guarded approach to equities and recommend allowing the current consolidation phase to unfold before expecting the next leg of higher prices.

From a macroeconomic perspective, inflationary pressures, while stubbornly persistent, are easing, with year-over-year (YoY) inflation in the U.S. now at 3.5 per cent, notably lower than the 9.1 per cent peak observed in 2022. Interest rates are showing signs of moderation, with U.S. futures markets indicating at least one rate cut this year. While in Canada, futures markets are implying two rounds of cuts by the Bank of Canada before year-end. Such accommodative monetary conditions have historically provided a favourable backdrop for both equities and bonds. Moreover, the U.S. labour market remains robust, with the unemployment rate holding steady at 3.8 per cent. Lastly, we note that money market fund assets in the U.S. are now at approximately US$6 trillion, which could continue to fuel further stock gains. 

In Stan Wong Managed Portfolios, our focus remains steadfast on identifying high-quality, secular growth companies to strengthen our portfolio mandates. We favour sectors such as health care, consumer discretionary, financials, and technology (with reasonable valuations). Geographically, our equity allocation comprises approximately 55 per cent in U.S. equities, 30 per cent in Canadian equities, and 15 per cent in international equities. Within our fixed income allocation, we favour government and investment-grade corporate bonds with both short and medium durations. Overall, our strategic allocation aims to enhance returns while prudently managing risk for our clients.

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TOP PICKS:

Restaurant Brands International Inc. (QSR TSX)

With system-wide sales of $43 billion last year, Restaurant Brands International is one of the largest quick-service restaurant (QSR) companies in the world. Restaurant Brands has a footprint of over 30,000 restaurants spread across more than 100 countries. Its iconic brands include Tim Hortons, Burger King, Popeyes and the recently acquired Firehouse Subs.

Throughout 2023, all segments within Restaurant Brands saw improved profitability, laying the groundwork for future growth ahead. Leveraging its global presence and focusing on menu innovation and digital transformation, QSR is positioned for sustained growth. The company’s franchised business model offers stability and cash flow visibility, complemented by a track record of shareholder value enhancement through increased dividends and share buybacks. Restaurant Brands is forecasted to achieve an earnings growth rate of about nine per cent over the next several years.

With an ascending pattern of higher highs and higher lows, QSR shares have been outpacing the S&P/TSX Composite Index since mid-2022. The shares offer investors a 3.1 per cent dividend yield which is expected to grow modestly over the coming years. Restaurant Brands reports its next quarterly results on August 8.

Home Depot Inc. (HD NYSE)

With forecasted fiscal 2025 revenue surpassing US$154 billion, Home Depot stands as the world's largest home improvement retailer, boasting over 2,300 warehouse-format stores across the United States, Canada, and Mexico. Renowned for its robust brand reputation, dominant market position, and consistent revenue growth, Home Depot enjoys a positive near-term outlook, buoyed by a stable U.S. housing market, steady consumer confidence, a healthy labour market, and lower interest rates ahead.

Looking ahead, the company is poised to sustain sales growth, driven by factors such as aging homes, a shortage in home inventory, and escalating home prices. Its resilience during economic downturns underscores the essential nature of home maintenance and improvement projects. Additionally, Home Depot's management team has demonstrated an impressive track record of value creation, exemplified by consistent dividend increases and share buybacks. Through dividends and share buybacks, the company has returned over US$70 billion to shareholders over the past five years, representing nearly 20 per cent of its market capitalization. HD shares present an attractive opportunity for investors, trading more than 16 per cent below recent highs and near its 200-day moving average. The shares offer investors a 2.7 per cent dividend yield and the company is scheduled to report its next quarterly results on May 14.

McKesson Corp (MCK NYSE)

McKesson Corp is a leading global pharmaceutical wholesaler engaged in the sourcing and distributing of branded, generic, and specialty pharmaceutical products to pharmacies. With forecasted 2024 fiscal year revenue exceeding US$311 billion, McKesson’s largest customers include CVS and Walmart. The company distributes pharmaceutical products to nearly one-third of the industry, leading to significant market leverage and predictable cash flow through supply negotiations. Long-term, an aging population is expected to drive increased prescription drug spending, with nearly 60 per cent of Americans currently using at least one prescription drug – a figure expected to rise, particularly in high-demand segments such as diabetes and weight-loss treatments.

Last summer, McKesson bolstered its commitment to shareholder-friendly initiatives by increasing its share buyback plan by US$6 billion. In its most recent quarterly results, McKesson beat analyst expectations on both the top and bottom lines, while upping its earnings guidance for fiscal 2024. From a technical perspective, the chart for MCK looks attractive with the share price trending higher above ascending 200-day and 200-week moving averages. The shares have been outpacing the broader S&P 500 Index since early-2019. McKesson is forecasted to achieve an annual earnings per share growth rate of about 12 per cent over the next several years. The Company reports its next quarterly results on May 7.

PAST PICKS: MAY 4, 2023

LVMH MOET HENNESSY (LVMUY OTC)

• Then: US$193.07
• Now: US$164.38
• Return: -15%
• Total Return: -13%

STARBUCKS (SBUX NASD)

• Then: US$104.72
• Now: US$74.64
• Return: -29%
• Total Return: -27%

VISA (V NYSE)

• Then: US$225.60
• Now: US$267.85
• Return: 19%
• Total Return: 20%

Total Return Average: -7%