John O'Connell, chairman and CEO of Davis Rea

Focus: North American large caps
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MARKET OUTLOOK
Markets continue to grind higher, reaching new record highs without much conviction either way. Economic numbers are beginning to improve globally, but still have a long way to go. The cyclical bull market continues to grind higher and with interest rates remaining low, the backdrop for earnings remains positive. The market feels like it is looking for excuses to sell off, as evidenced by all of the hype leading up to last Thursday’s events (the ECB rate decision, Comey’s deposition and the election in the U.K.), and the resulting reaction of the market akin to a non-event. Money continues to rotate through sectors, and we believe that the market will continue to grind higher through the summer, leaving investors frustrated.

TOP PICKS

John O'Connell's Top Picks

John O'Connell, chairman and CEO of Davis Rea, shares his top picks: Apple. Goldman Sachs and AltaGas Subscription Receipts.

APPLE (AAPL.O)
Apple is one of the largest technology companies in the world selling personal computing devices and communication devices. The company continues to expand its global reach as sales of new devices continue to trend upwards. We are positive on the upgrade cycle for the new iPhone, and positive on the opportunities provided through their new home speaker, which was announced at WWDC a couple of weeks ago. The large install base of Apple devices and the closed ecosystem allow for the company to provide a tightly-linked experience, and allow for increased adoption of new technologies. In that regard, the announced releases of AR Kit and SiriKit were impactful as these developer tools allow for the large iOS developer base to release more functionality for Siri, Apple’s virtual assistant, to rival Google and Amazon’s virtual assistants, and to increase the adoption of virtual reality and augmented reality use cases, as AAPL now possesses the largest augmented reality platform on the planet. Lastly, with potential tax reform on the horizon, Apple could repatriate cash trapped overseas and pursue larger acquisitions to diversify or transform the business.

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.

ALTAGAS SUBSCRIPTION RECEIPTS (ALAr.TO)
AltaGas Ltd. is an energy infrastructure company with operations that include natural gas gathering and processing, transmission, power generation, and rate-regulated utilities. The company’s operations are primarily based in Western Canada, but the company is increasing its U.S. footprint. AltaGas recently announced the purchase of WGL Holdings Inc, a diversified U.S. energy company with the majority of its assets being regulated utilities using $2.1 billion worth of equity. The transaction will be immediately accretive to the company and continue to provide earnings accretion for the next four years. We like the subscription receipts over the common equity as it provides an implicit put at $31 if the deal does not close in the second half of 2018, but receives the dividend in the interim, which is sufficiently covered by the existing business.
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
AAPL Y Y Y
GS Y Y Y
ALAr Y Y Y


PAST PICKS: JULY 6, 2016

John O'Connell's Past Picks

John O'Connell, chairman and CEO of Davis Rea, reviews his past picks: Facebook, Walt Disney and Celgene.

FACEBOOK (FB.O)

  • Then: $116.70
  • Now: $149.77
  • Return: 28.33%
  • TR: 28.33%

WALT DISNEY (DIS.N)

  • Then: $98.45
  • Now: $106.14
  • Return: 7.81%
  • TR: 9.40%

CELGENE (CELG.O)

  • Then: $104.60
  • Now: $121.12
  • Return: 15.79%
  • TR: 15.79%

TOTAL RETURN AVERAGE: 17.84%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
FB Y Y Y
DIS Y Y Y
CELG Y Y Y


FUND PROFILE: DAVIS REA EQUITY FUND

PERFORMANCE AS OF MAY 31, 2017:

  • 1 month: Fund* -1.65%, Index** -0.10%
  • 1 year: Fund* 4.24%, Index** 12.7%
  • 3 years: Fund* -0.18%, Index** 5.27%

* Returns are gross of fees
* Index: 50% S&P/TSX 60 Index, 50% S&P 500 Index


TOP HOLDINGS AND WEIGHTINGS

  1. U.S. dollar: 11.11%
  2. Tourmaline Oil: 7.86%
  3. AltaGas Subscription Receipts: 7.75%
  4. Kelt Exploration: 7.22%
  5. Spartan Energy: 6.28%


TWITTER: @DavisRea
WEBSITE: www.davisrea.com