John O’Connell, chairman and CEO at Davis Rea

Focus: North American large caps
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MARKET OUTLOOK
The global economy is in a modest synchronized expansion. Interest rates remain low and while they have risen recently, and may be expected to rise gradually and modestly, they are expected to remain supportive to the global expansion. The U.S. dollar has risen against its trading partners for the past year. This has been a result of relatively attractive interest rates, relatively attractive GDP growth and relative strength from a political stability perspective (yes, I understand the contradiction here but Europe has its share of political belligerence too). Equity markets have been marching higher for seven years. That’s not a bad thing in and of itself. The past is not what’s important but rather what will happen in the future that counts. As Warren Buffet says, the market is a voting machine in the short run but a weighing machine in the long run. The stock market’s spurt of 10 per cent since the U.S. election has been the product of roughly equal parts optimism over the Trump agenda and momentum from the moderately expanding global economy. The underlying pro-growth optimism that Trump brings remains in place but it seems to us caution is warranted. Additionally, global trade worries stemming from the rhetoric of camp Trump and questions of the ability to enact tax cuts may begin to take the air out of optimism. Reported profits are likely to enjoy solid gains in the first three months of this year, but that really reflects the lackluster growth of the past few years. Higher interest rates and a strong dollar are likely to at least hinder growth in housing and exports as the year progresses.

TOP PICKS

STANLEY BLACK & DECKER (SWK.N)
Stanley Black & Decker is a diversified global provider of industrial tools and security which provides exposure to the U.S. home building, renovation and industrial markets. In addition to the acquisition of Newell Brand’s Tools (Irwin and Lenox) and the Craftsman businesses, the company has recently sold their mechanical lock business, and continues to work towards driving further organic growth while integrating new businesses. Management has a great track record with integration of acquisitions, and we should see synergies come in nicely this year. The company continues to fire on all cylinders, with new products such as the DeWalt Flex Volt battery driving sales worldwide and helping the company to continue generating both free cash flow and dividend growth.

CERNER CORP. (CERN.O)
Cerner Corporation is a worldwide supplier of health-care technology solutions and services to health-care organizations such as hospitals, pharmacies and ambulatory centres. The company’s solutions optimize processes such as patient intake, treatment workflows, and insurance reimbursement to increase efficiency and reduce errors. The company is in strong financial shape, focuses on growing organically and has been continually generating record order backlog for their products. It recently purchased Siemen’s Healthcare IT portfolio, but outside of that, has grown revenue at a 14 per cent ten-year CAGR and operating earnings at 22 per cent ten-year CAGR, with a large majority of the growth coming organically. It will also be a beneficiary of new reimbursement models related to quality of care, and changing health-care regulations in the United States to mandate meaningful use of technology and electronic health records, which should be a tailwind for the company as health care organizations continue to invest in technology to meet regulatory standards.

SPARTAN ENERGY (SPE.TO)
Spartan Energy provides low-cost exposure to the energy sector through its extensive land positions, the majority of which are in Saskatchewan. The company recently completed the acquisition of an additional package of light oil assets in December 2016, allowing them to increase production to the 20,000 boe/d range. Spartan has one of the most disciplined and experienced management teams in the business. Despite the large acquisition, the company’s balance sheet remains strong, with a debt to cash flow ratio of 0.7. Spartan recently released an operational update for the first quarter, with strong results in their new land plays and encouraging drilling results. In spite of this, Spartan continues to trade relatively cheaper than its comparable peers in the intermediate space.
 

PAST PICKS: MAY 3, 2016

CONCORDIA INTERNATIONAL (CXRX.O)

• Then: $26.42
• Now: $1.39
• Return: -94.73%
• TR: -94.71%

WALT DISNEY COMPANY (DIS.N)

• Then: $103.78
• Now: $113.04
• Return: +8.92%
• TR: +10.53%

APPLE (AAPL.O)

• Then: $95.18
• Now: $141.80
• Return: +48.98%
• TR: +52.13%

TOTAL RETURN AVERAGE: -10.68%