Mar 1, 2017

John Burke's Top Picks: March 1, 2017

BNN Bloomberg

John Burke, president, Burke Financial Strategies

Focus: U.S. equities

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MARKET OUTLOOK:

RISK:

Global trade is not a zero-sum game. One country's gains are not another's losses and if Donald Trump wants to complain about foreigners not buying U.S. goods, he should also thank them for buying U.S. Treasury bonds to finance America’s huge budget deficit. While we’re well aware there are losers in the global trade, little attention is paid to the cheap prices caused by it.

This may be the event that helps Europe, as they fill any void left by a withdrawal of the U.S. in global trade. Watch for trade data to see if it’s truly declining and if so, watch out.

OPPORTUNITY:

It’s ironic that Trump sees global trade as a zero-sum game because he clearly realizes the U.S. economy isn’t. The things the president is doing to free up corporations, from lowered taxes to allowing them to move overseas cash back to the U.S., will be very good for business and create jobs.

We think that technology stocks will be the key beneficiaries. Technology is one of the reasons productivity has been at a standstill since 2000. According to a recent study by Allstate, almost 40 per cent of people admit to texting while driving and almost a third admit to using the Internet. If they’re using those smart phones while driving, they’re using them at work.

The two key technology inventions since 2000 have been turning the cellphone into a smartphone and the creation of social media. These don’t contribute to productivity. On the other hand, semiconductor sales have taken off over the last year. These chips are ending up in the internet of things, and will help productivity. We believe technology stocks represent a big opportunity.

TOP PICKS:

AMERISOURCEBERGEN (ABC.N)

We try to stick with companies that have a high free cash flow yield no matter what we think of the story. With Amerisource, the story is boring — except that this is the most profitable nonfinancial company we can find.

Amerisource distributes pharmaceuticals and other health-care products. About 20 per cent of all pharmaceuticals get to market via the company, with over $100 billion in revenue. The health-care sector is a place to find bargains, with Amerisource selling for about 30 per cent below its peak. Free cash flow is over 10 per cent per share.

SEALED AIR (SEE.N)

Sealed Air’s founders tried to invent plastic wallpaper —which was a bad idea — but they made a fortune selling the product as packaging material, which we all know today as bubble wrap. The company’s growth however is not with bubble wrap, but with shrink wrapping food. Their Cryovac product dominates the food service business. The packaging of the meat you buy in the supermarket was likely done with a Sealed Air product.

The company’s stock is selling for over 15 per cent below its peak, which is rare for them as they have exhibited consistent growth and a stock price to go with it. The free cash flow yield is over 7 per cent.

ORACLE (ORCL.N)

All the excitement in technology is with the semiconductor stocks. Stocks we own like Analog Devices, Maxim, Texas Instruments and Microchip are all up a lot, with Maxim’s 30-per-cent gain being the smallest in the group. Instead of chasing those names we’re recommending Oracle, which is a software company started by Larry Ellison who used to do programming for the CIA.

Oracle specializes in data storage software. One of the issues investors face with the company is with earnings, but the problem is the company is switching from recognizing earnings when a sale is booked to when the cash is received. Oracle’s stock looks a lot better judged by free cash flow yield, which is currently at 7.45 per cent according to FactSet. Importantly, free cash flow generation has been very consistent. If the sales surge for semiconductor companies is any indication of corporate spending, this stock should do well yet it’s still much cheaper than the semis.