Jan 17, 2018

Mike Newton's Top Picks: January 17, 2018

BNN Bloomberg

Mike Newton , BNN

Mike Newton, director of wealth management and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs
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MARKET OUTLOOK

Currently the world economy continues to gather momentum with the help of a near unanimous expansion in the global GDP of many country constituents. This is translating into a healthy upturn in corporate earnings, a development which continues to offer key price support for the global markets. Are things too good? Conventional wisdom holds that bottoms are made on the “worst news” and tops are made on the “best news.” It is hard to believe the news could get much better.

As this bull market continues to evolve I wanted to leave you with a reminder of my approach: “Always follow the trend until there's no more trend.” The best way to continue playing the rally is to let it ride, but be very cognizant of any breakdown in upside momentum. I've heard countless times since the 2009 bottom that the bull market is coming to an end. But why? Whether you understand the reasons for it, the stock market is extremely strong and waiting for the next bear market is not a great strategy when prices are rising without obstruction. Obviously every investor would love to enter the market after a 10 per cent correction, but how long will that take?

We will stay invested until the trend changes, either in individual sectors or the broad market, and when that time arrives our stop loss strategies will go a long way to protect us to some degree. Once the market’s uptrend breaks, it could be a painful trip lower if you don’t have a risk management plan in place.

TOP PICKS

U.S. SILICA HOLDINGS (SLCA.N)
U.S. Silica is a leading producer of industrial minerals, including sand proppants, whole grain silica, and silica. Founded more than 100 years ago, U.S. Silica serves a wide variety of industries and applications including oil and gas, glass, chemicals, foundry, and building products. SLCA currently trades near the middle of its five year range; it's trending higher off summer lows in response to tight crude markets pushing up oil prices to the mid-60s. If we see sustained growth in rig counts and therefore frack sand demand, we should expect SLCA to fare well. The stock looks relatively cheap at 11.6x earnings. If SLCA can maintain pricing power, and activity holds at current to slightly stronger levels, SLCA will continue to trend higher. Last purchased Jan 11, 2018 at US$38.00.

GENERAL ELECTRIC (GE.N)
GE was the Dog of the Dow in 2017, losing almost half its value during the broad market rally. After lagging the rest of the Dow in a big way for two years, 2018 was signalling a nascent turnaround in recent trading sessions until yesterday. Only time will tell if this is the start of a bigger, sustained move in this industrial sector giant. Late last year, GE cut its annual dividend to 48 cents US from 96 cents US, only the third in the company's 125-year history. And just yesterday GE Capital announced it is taking a US$6.2 billion charge for its legacy reinsurance business, and to fund that it is eliminating its dividend to the GE parent company. There were also sources citing a break up of the company as early as this summer. GE’s long process to focus on only several key sectors (aviation, power, health care) is just beginning. I am by no means trying to pick a bottom with GE, however I am intrigued by its value and new management. Sentiment may continue to rule GE for the time being, but I would argue that a majority of the selling is likely done. GE can best be described as an asset play and it will be interesting to see how the new CEO John Flannery conducts the turnaround of this company. I have taken a small position in a more speculative portfolio I manage. Last purchased Jan 11, 2018 at US$19.14.

CCL INDUSTRIES (CCLb.TO)
CCL Industries shares are off about 20 per cent from recent highs. Recent weakness is offering a good entry opportunity into this strong growth-oriented packaging giant. Recall that Q2 and Q3 results both missed consensus expectations, which was the first time CCL missed in over three years. I contend that elements largely outside of CCL’s control may be responsible: larger Canadian institutions may rotating their materials weight into actual materials stocks given the move in the commodities (specifically base metals). Now we also have Nutrien which is by far the biggest material weight in Canadian benchmarks. We must not underestimate how many Canadian dividend investors owned CCL as their only materials name. Looking over the past year, the Q2 miss was largely driven by transitory issues at CCL Secure with its exposure to a spike in polypropylene prices and the Q3 miss can be partially attributed to the integration of the new Innovia business. I continue to expect the company to be an active consolidator – management has previously stated it believes it can still double the size of the business utilizing its balance sheet and cash flow to fund deals. Remarkably the company hasn’t issued equity since 1998! Furthermore, management has proven itself to be very successful in M&A (Avery, Checkpoint, Innovia). Last purchased Jan 10, 2018 at $57.00.