John O’Connell, chairman and CEO of Davis Rea

Focus: North American large caps
_______________________________________________________________

MARKET OUTLOOK
We continue to forecast slow and moderate global growth. North American businesses continue to be modest in their business dealings and cautious about expansion, leading to restraint with regards to investment spending. Europe continues to languish with similar sluggish dynamics exacerbated by a dysfunctional banking sector. Pricing power for many companies continues to be moderate despite higher probabilities of inflation and rising interest rates, but technological innovation continues to prove deflationary and disrupt incumbent companies’ profit margins. Interest rates will remain low going forward, but companies who are increasing debt levels at low rates to finance stock buybacks and dividends in the face of declining profits are causes of concern. Commodity prices continue to recover, providing some optimism for a moderate recovery globally, but the real threat to global growth continues to be a political threat. Politicians globally continue to reflect angry populations that are uncertain of the benefits of global trade, and elections in North America and Europe over the next year will focus investor angst over the threats of global protectionism. Cash continues to be a safe harbour for us, and we continue to preach caution and wait for opportunities to further deploy our capital.

TOP PICKS

FACEBOOK (FB.O)
Facebook is one of the largest social-media companies in the world, with a user base of one in seven people globally. User growth continues to impress, as four of their products have reported monthly active user counts of over one billion, and have crossed the one billion mark for daily active users on Facebook and mobile Facebook. With the continued expansion of their user base and the high engagement level of its users, the rate of monetization per user continues to increase, as advertisers continue to move their advertising dollars to Facebook’s social networks. Alongside the growth in users and advertising revenue, Facebook continues to improve their video offerings with products like Facebook Live, and continue adding functionality to their messaging platforms for both payments and business to consumer engagement. The company is also beginning to expand into the workplace, with Facebook Workplace entering the enterprise communication ring. With many levers to pull for user growth, Facebook continues to maintain their position as the hub of consumer interaction with the internet.

ALPHABET INC. (GOOGL.O)
Alphabet is the parent company of Google Inc., which provides web-based services to consumers and enterprises such as search, advertisements and software. As the undisputed leader in desktop web search, the company continues to improve its foothold in mobile search and advertisements and has a number of other high-growth assets such as video offerings (YouTube) and mobile assets (Android and Google Play). On the mobile side, Alphabet has always been known as a software and advertising company, but has recently entered the hardware arena as well, with the recent release of their new phone. Google continues to impress in its dominance of advertising and search in multiple venues and with ongoing cost controls, we expect to see margin expansion contribute to the bottom line.

CELGENE (CELG.O)
Celgene is a global biopharmaceutical company, focusing on the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases. Celgene is one of the best capitalized large cap biotechnology names with a strong pipeline for growth. Its multiple myeloma franchise continues to be the engine driving the company forward, but it is supported by other products in their portfolio. The company is on its way to having four products with at least $1 billion in annual revenues, and continues to work on expanding distribution of the drugs internationally, and the number of indications the drugs are approved for, to expand the addressable market. Celgene continues growing revenue in double digits through sales of its existing products, and combined with their large pipeline from both their own internal research and development efforts and partnerships with other companies, provides a long runway to continue growth. The sector has been under pressure recently due to the upcoming election, but we believe the stock continues to work higher after the overhang is removed. 
 

PAST PICKS: MONDAY JULY 13, 2015

BROOKFIELD INFRASTRUCTURE PARTNERS (BIP.N)

• Then: $44.54*
• Now: $34.11
• Return: 14.87%
• TR: 22.80%

*The price reflects an adjustment to account for a 3-for-2 stock split on September 15, 2016.

INDIA FUND (IFN.N)

• Then: $26.98
• Now: $24.60
• Return: -8.82%
• TR: -0.63%

KELT EXPLORATION (KEL.TO)

• Then: $8.32
• Now: $6.41
• Return: -22.95%
• TR: -22.95%

TOTAL RETURN AVERAGE: -0.26%
 

FUND PROFILE: DAVID REA EQUITY FUND

PERFORMANCE AS OF SEPT. 30, 2016:

• 1 month: Fund 1.33 %, Index* 0.35%
• 1 year: Fund 6.0%, Index* 11.18%
• 3 year: Fund 7.68 %, Index* 7.12%

* Index: 50% S&P/TSX60 Index, 50% S&P 500 Index
* Returns are gross of fees

TOP HOLDINGS AND WEIGHTINGS

1. Spartan Energy: 9.34%
2. Tourmaline Oil: 8.68%
3. Keyera Corp: 7.05%
4. Kelt Exploration: 6.82%
5. Alphabet Inc.: 6.74%

TWITTER: @DavisRea
WEBSITE: www.davisrea.com