Jan 16, 2017

Jason Mann's Top Picks: January 16, 2017

BNN Bloomberg

Jason Mann , BNN

Jason Mann, CIO at EdgeHill Partners

Focus: North American equities
_______________________________________________________________

MARKET OUTLOOK

2016 was full of surprises with unexpected market reactions to events like Brexit and Trump and the start of a major regime shift from defensive bond-proxy stocks to cyclical value stocks.
We think that the trends that were in place at the end of 2016 will continue into 2017: reflation and earnings growth, rising interest rates, cyclical value stocks leading the market higher, and bonds and defensive stocks as laggards.
Wage pressure, not new jobs, key at this point in cycle (don’t stress about lower job growth).
Easy money already made by buying the “might go bankrupt” value stocks. Next leg is a focus on cash flow and quality, more than cheap price-to-book.
Underweight growth stocks (high valuation stocks). Growth works when growth is scarce like it was in the last few years. When economy grows, focus on cheap stocks.
Underweight safety, defensive, and “bond-proxy” stocks. For yield, stick with banks, insurance, industrials and discretionary where they can grow the dividend.
The move to an inflationary environment should be viewed as late-cycle, and we think we are in the "seventh-inning stretch" of this bull cycle.
Equity valuations aren't cheap on an absolute basis, but appear undervalued relative to bonds in an environment of rising rates.
In the context of the outperformance of defensives over cyclicals for multiple years running, the mean reversion has room to run before one would argue the pendulum has swung too far.

TOP PICKS

AIR CANADA (AC.TO)

Air Canada, despite having a large move higher recently, still scores in the top 10 per cent on both price momentum and valuation.
Inexpensive: trades at only 3.3x EV/EBITDA and 4x PE. Peers trading at 5.5x EV/EBITDA and PEs that are twice as high.
Finally in a position to start generating solid free cash flow — estimates of $2/share for 2017.
Good revenue, EPS and EBITDA growth.
Have fixed balance sheet through operations and cost control, and pension is overfunded now.
Have been investing in fuel-efficient fleet as well — important given sensitivity to fuel costs.
Overall has been a very long turnaround story and assuming industry competitors maintain pricing discipline, they should be able to reap the rewards of it now.

Quebec-based financial services that offers insurance and financial advice, brokerage, other services.
Has all three characteristics we look for: strong price momentum (top 20 per cent), good value (top 10 per cent) and is a stable stock.
Offers a yield as well, with ability to grow, and has history of beating on earnings which we like.
Recently bought HollisWealth from Scotia — so there is a growth by acquisition component to their wealth management business.
Insurance business will benefit from rising rates.
Challenge has been net outflows in their mutual fund business, but that seems to be turning the corner.
Slow and steady wins the race for this stock.

Fits our themes of cyclical value and improving consumer via employment gains.
Very cheap stock — scores in top five per cent of stocks at 6.1x PE, 2.5x EV/EBITDA, 1.3x Book and 24 per cent ROEs.
Balance sheet is solid (bankruptcy will do that for you), and pays a good four per cent yield.
Price momentum has been middle of the pack, but post-election has ramped up considerably. Lots of room to run given valuation.
Fleet age in U.S. is still >10 years, so there is a need for vehicle renewal. Improving wages will accelerate that. Given reasonable gas prices, people are more likely to buy higher margin vehicles (trucks and SUVs).
Company recently guided higher for 2017 on North American strength as well as growth of GM Financial.
Pursuing shareholder-friendly $5 billion buyback and have committed to return all excess free-cash flow after cash balance of $20 billion is met, so could see more buybacks and/or higher dividend.