John Petrides, managing director and portfolio manager at Point View Wealth Management

Focus: U.S. equities
_______________________________________________________________

MARKET OUTLOOK
Since 1980, with the exception of the major selloffs, i.e. 1987, 2008 and 2009, equity markets have dropped seven per cent on average during the course of the year, from peak to trough. So investors should expect, during the course of any year, a market selloff. Stock valuations are elevated, but we don’t see the market in bubble territory. However, they are no longer table-pounding cheap, either. Compared to bonds and cash, stocks look attractive. If and when a selloff does happen, investors should use it as a buying opportunity. In the meantime, continue to focus on diversification and rebalancing.

Coming into this quarter, analysts were expecting a nine per cent year-over-year earnings growth for companies in the S&P 500. If achieved, this would be the largest year-over-year earnings growth since Q4 2011. So far, more than 70 per cent of the companies reporting have beaten analyst estimates. If this continues, it means the “E” in the P/E is understated, and stocks are cheaper from a valuation standpoint than they appear. Remember this is all being done without tax reform from the Trump administration which, if passed, will give another shot in the arm to earnings growth.

Right now the Federal Reserve could not have asked for anything more. They have been able to raise rates two quarters in a row and the markets have taken it in stride. The Fed remains on pace for two more hikes in 2017, to complete the three hikes planned for 2017. The Fed’s attention is on wage growth. If wage growth accelerates closer to three per cent, up from 2.5 per cent now, then markets could become more volatile, as the case mounts for the Fed to raise rates at a faster pace. Until then, this is a Goldilocks environment: Interest rates, although rising, are still very low. Inflation is relatively contained. Global market volatility is muted, earnings growth is solid, the global economy is moving along, and the Fed is showing the ability to lift the rock of moral hazard from the market.

However, with heightened geopolitical tensions and recent unnerving cyberattacks, investors should not be complacent with the market performance this year, and should continue to diversify and prepare for the unexpected to happen, rather than react when it does.

TOP PICKS

HELMERICH & PAYNE (HP.N)
HP is the largest land driller for oil and gas in the US. The stock offers a 4.5 per cent dividend yield, and its dividend has grown 30 per cent annually for 10 years. At the end of 2015, the company completed its massive multi-year capital expenditure program to upgrade and revolutionize its rig fleet. They also have a solid balance sheet with more cash than debt. The company dominates the Tier-1 rig space, which consists of the highest-margin rigs. The stock is down 24 per cent year to date. At 12x P/CF, with a solid dividend, a strong balance sheet, and its cap ex spending largely behind them, HP is compelling at current levels.

QUALCOMM (QCOM.O)
QCOM is a leader in chip technology for mobile devices. The company also derives a large portfolio of its revenue from royalty payments for its technology. At current prices the stock has a dividend yield of 3.9 per cent, which it has grown 18 per cent annually over the past decade. They have also bought back six per cent of shares outstanding annually over the past two years. The company has a very strong balance sheet. The telecom operators are about to begin the next upgrade cycle, “5G,” which QCOM will benefit from. Finally, QCOM is also making a very strategic acquisition in NXP Semiconductors (NXPI). NXP’s chips support Apple Pay, the chips in credit cards, and help make autos truly a “mobile device." The addition of NXP will add new channels of revenue and growth for the company. With the strength of its balance sheet, and the commitment to return cash to shareholders, we like QCOM for portfolios. The stock sold off recently because of patent litigation with Apple. This is not uncommon for QCOM. It may take some time, but the issue will get resolved.

ASA GOLD AND PRECIOUS METALS (ASA.N)
ASA is a closed-end mutual fund consisting of a basket of gold miners, with Rangold, Goldcorp and Barrick Gold being the top three holdings. Since it is a closed-end fund, there are only a limited number of shares issued. Closed-end funds can trade at a premium or discount to their net asset value (NAV). The fund is currently trading at a 9.4 per cent discount to its NAV. However, unlike most closed-end funds, ASA uses no leverage. Also, the dividend yield is only 0.33 per cent. So why the discount to NAV? We view this as a diversified way to own exposure to gold, which we believe is important to own in the current environment, and with the discount to NAV, it’s as though investors are buying $1 for $0.90.
 

PAST PICKS: FEBRUARY 9, 2017

MATTEL (MAT.O)
Investment thesis remains the same, despite what appears to be a more challenging retail environment. Have been working through a turnaround for two years now. Management continues to embrace 3D printing to make toys. At current prices the stock offers a 6.7 per cent dividend yield, but analysts are questioning its sustainability. However, the stock is cheap from a valuation standpoint, trading at 14x price-to-forward earnings, and 1.5x price-to-sales. New Cars movie will help. Owner of Fisher Price, American Girl and Barbie, the brands, size and scale give MAT a significant competitive advantage. Margins continued to be pressured by FX/strong USD.

• Then: $25.95
• Now: $22.14
• Return: -14.70%
• TR: -11.96%

AMDOCS (DOX.O)
Investment thesis remains the same despite the stock being up nine per cent year to date. DOX is a provider of billing and back office systems for telecom and cable providers. 15x P/E. 1.3 per cent dividend yield. $9.3 billion market cap. Grown the dividend 13 per cent annually over the past three years. Bought back four per cent of shares outstanding annually over the past 10 years. Five per cent free cash flow yield. $770 million in cash, no debt on the balance sheet (10 per cent of company in cash). Seventy to 80 per cent of sales are recurring. Top 10 customers = 70 per cent of sales. Current backlog is $3.18 billion. Revenue is $3.7 billion. Often wonder why this company has not been taken private. DOX is in a stable business that generates tremendous cash flow. They have no debt on the balance sheet. Seems like a private equity company could take on cheap debt to take the company out. If not, with the amount of annual shares being purchased, the company will take itself private.

• Then: $58.57
• Now: $63.69
• Return: +8.74%
• TR: +9.13%

HANESBRANDS (HBI.N)
Investment thesis remains the same. Stock is cheap from a valuation standpoint trading at 10x earnings. Management has done a great job executing its “innovate to elevate strategy.” They have also become good capital allocators and have been able to reinvent a commodity category: tagless; X temp. Made solid strategic acquisitions like Maiden Form. Tripled dividend since 2013; 2.3 per cent div yield. Cotton costs remain low at $0.75/ton. Weaker foot traffic at malls is hurting, as retailers are charging more for shelf space. The key to the long-term growth story is on the international front. International sales are growing double-digits, but are 30 per cent of sales.

• Then: $19.89
• Now: $20.34
• Return: +2.24%
• TR: +3.69%

TOTAL RETURN AVERAGE: 0.29%