John O'Connell, chairman and CEO of Davis Rea

Focus: North American Large Caps
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MARKET OUTLOOK
Markets continue to remain sleepy and grind higher, driven by the same leadership in growth stocks and stretching valuations further. Earnings season has begun, and reports have been decent so far, supporting our view that the economic environment is positive for earnings growth over the coming year. We continue to remain wary of concentration risk in certain names, especially as markets feel like they’re driven up by ETF flows, but still see pockets of value for investment in the technology, health care and financials sectors. Energy appears to have found some support as larger than expected draws in inventories are beginning to show in the weekly data, supporting a move higher in the commodity and commodity-related equities. Rates have begun to move higher in Canada after the Bank of Canada increased the overnight rate by 25 bps at their last meeting, while the U.S. Federal Reserve is expected to continue to nudge rates higher into 2018, but we believe that the strength in the Canadian dollar puts a slower pace to rate hikes going forward.

TOP PICKS

ACCENTURE PLC – CLASS A (ACN.N)
Accenture is the world’s largest consulting firm that provides management and technology consulting services and solutions to clients globally. The company has been pivoting since 2014 to focus their consulting business on newer areas such as digital experience, data analytics, cybersecurity and cloud services, which now collectively comprise about 50 per cent of their revenues. They have achieved this through organic growth and a combination of tuck-in acquisitions, which have been funded through free cash flow generation. It carries a pristine balance sheet with almost zero debt and generates an abundance of free cash, which is allocated to acquisitions to grow the business and to shareholder return through a dividend (currently yielding 1.9 per cent) and share repurchases. As the world focuses more on digital channels, Accenture is well positioned to benefit from the ongoing shift to cloud computing and focus on data-driven digital insights and experiences. They have a great track record with integrating their acquisitions into their consulting practice, and continue to win market share.

GOLDMAN SACHS (GS.N)
Goldman Sachs is a global investment bank. With financial reform finally approaching, Goldman is positioned to benefit from the repeal of Dodd-Frank. Additionally, with potential geopolitical risk providing volatility and U.S. tax reform still yet to come, Goldman’s investment banking business should be a net beneficiary with increased M&A and capital markets activity once repatriated cash is put to work. The company has been using excess capital to return capital to shareholders through dividend increases and share buybacks, and continues to show operating leverage with increased cost-cutting initiatives benefitting the bottom line. The company reported a good quarter despite weaker than expected revenues from fixed income, currencies and commodities trading, but had strong results across the rest of its business lines (notably, ranking first globally in equity underwriting and M&A transactions at the halfway mark of the year).

WELLS FARGO (WFC.N)
Wells Fargo is one of the largest banks in the United States with one of the largest retail networks in the country. It is shaking off the effects of its retail sales issues and has a clear view to settling the charges, with improvements in customer perception beginning to occur. Management has improved the credit quality of the loan book, notably tightening underwriting standards in both mortgages and auto loans, and divesting some auto loans. The management team is continuing a program to trim operating expenses (aiming to trim $2 billion of expenses by the end of 2018, with another $2 billion of savings to be realized by 2019), as they were higher due to litigation issues from years past. Add in the potential to divest non-core assets, and Wells Fargo is well positioned to execute its capital plan of repurchasing up to $11.5 billion of stock and increasing its dividend (currently yielding 2.75 per cent), while maintaining strong capital ratios. 
 

PAST PICKS: JULY 6, 2016

FACEBOOK (FB.O)

• Then: $116.70
• Now: $166.00
• Return: +42.24%
• TR: +42.24%

WALT DISNEY (DIS.N)

• Then: $98.45
• Now: $107.00
• Return: +8.68%
• TR: +11.12%

CELGENE (CELG.O)

• Then: $104.60
• Now: $137.84
• Return: +31.77%
• TR: +31.77%

TOTAL RETURN AVERAGE: +28.37%