Dec 21, 2016

Michael Sprung's Top Picks: December 21, 2016

BNN Bloomberg

Michael Sprung , BNN

Michael Sprung, president at Sprung Investment Management

Focus: Canadian large caps
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MARKET OUTLOOK
This year has been a year to remember for investors. The U.K. vote to leave the European Union came as a surprise to the pundits, media and the investment community, who were all shocked again as Donald Trump won the presidential race in the U.S. Then, despite all the opinions to the contrary, the U.S. stock market did not go down but recorded the longest-running post-election rally in history. While all of this was occurring, the European migrant crisis persisted, causing vexation within the local populations and spurring more radical political movements. A disturbing trend from an investor's point of view has been the rising volume of anti-free trade and anti-globalization rhetoric. The underlying financial problems within the European Union with respect to Portugal, Italy, Greece and Spain remain unresolved, as if politicians are hoping that a "deny and delay" policy will push these crises onto future governing bodies. Other issues that continue to persist include disturbances in the Middle East (particularly Syria), Chinese hegemony in the South China Sea, Russian incursions into Ukraine and Syria (and maybe even U.S. politics), etc.

As we head into 2017, we will carry all of this baggage with us as well as face many new, yet unknown disruptions as we do every new year. While it is not known what the longer-term consequences of a Trump presidency will be, the U.S. economy is expanding and it is unlikely that policies will be introduced to intentionally stunt that growth. While investors played a waiting game with the Federal Reserve in 2016, it appears that there is now confidence in the strength of the U.S. recovery to allow interest rates to increase. In Europe, despite problems in a number of areas, the overall economy is exhibiting signs of more stability and even some growth. While growth in the emerging economies has slowed, growth relative to the developed world is robust, producing greater wealth and higher demand for goods and services.

Technology continues to reshape our world in an ever-accelerating fashion. There will be winners and losers in this trend, but change is inevitable. 2016 is still fresh in our minds. The new year, 2017, will bring its own shocks and surprises. Investors will prosper if they stay fast with their discipline and do not get distracted by the turbulence that surrounds them. We wish everyone a healthy and prosperous New Year.

TOP PICKS

ALARIS ROYALTY CORP. (AD.TO) – Last purchased November 2, 2016 at $19.84
Alaris has undergone a challenging year. Since the beginning of 2016, problems in some of the companies in which Alaris had invested dragged on without satisfactory resolution. Since July, more problems came to light with some write-downs. The share price declined steadily as investors became concerned with the sustainability of the dividend and Alaris' debt-coverage ratios. Throughout this period, management was negotiating workouts with the companies with issues. At this time, positive resolutions to many of the issues appear to be in sight. The company has expanded its financial capacity and successfully initiated investments from a new small-cap division. The dividend appears more secure now and we anticipate that upward revisions to the dividend will be forthcoming in the years ahead.

ARC RESOURCES LTF. (ARX.TO) – Last purchased March 9, 2016 at $18.72
ARC is one of Canada's leading conventional oil and gas companies with operations in Western Canada. The recent sale of assets in south-east Saskatchewan at Weyburn and Midale will further strengthen an already strong balance sheet as well as free up capital to be deployed in the acceleration of 2017 drilling plans in the Montney region. ARC has been disposing of non-core assets as management concentrates on more profitable production opportunities. Management has been diligent in capital management throughout the commodity price downturn. A dividend increase by late next year may be forthcoming with the balance sheet improvement.

AGT FOOD AND INGREDIENTS INC. (AGT.TO) – Last purchased December 18, 2014 at $26.50
AGT is a leader in pulse processing for export and domestic markets. The company has had notable success in diversifying into food ingredients, an area that is facing increasing global demand. 2016 was declared by the United Nations to be the International Year of the Pulse, highlighting the growing global demand for pulses. Although pulse production in 2016 has been at record-setting levels, harvesting has been later than anticipated, pushing revenues forward. Export demand is growing, and AGT has been expanding its pulse handling and food ingredient production capabilities. Ingredion, a distributer of AGT's pulse base flour and ingredients, has made two significant acquisitions in the specialty ingredients portfolio, lending confidence to AGT's expansion in his area.