Mar 28, 2019

Mike Newton's Top Picks: March 28, 2019

BNN Bloomberg

Mike Newton , BNN Bloomberg

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

MARKET OUTLOOK

Over the past several months, pessimism has been pronounced. Pessimism is intellectually seductive in a way optimism only wishes it could be.

I think it’s extremely important to temper your expectations and try to assess things with evidence. It’s imperative to take advantage of excessive economic outlooks and the emotional dislocations of other investors. I would argue that more money is lost preparing for corrections and recessions than is actually lost when they arrives. Recessions are relatively rare, so constantly forecasting them and positioning portfolios in preparation for them is a very expensive proposition in terms of opportunity cost. We just had a quick and nasty 20-per-cent correction that cast a shadow over year-end holidays around the world.

In December 2018, the NYSE Bullish Percent reached an extreme low reading not seen since 2011. The reading has since turned around quite nicely into neutral territory. There’s no doubt that various indicators are weakening, but a recession is by no means locked in. Currently, market breadth is very strong across all major North American market indexes, which is not normally an indicator of bad times ahead.

The most important thing an investor can do now is to make sure you have the ability and flexibility to adapt to unsustainable situations via three risk-management tools: liquidity, portfolio diversification and stop loss rules. If we’re indeed facing slowing global economic growth, sectors with sensitivity to demand for capital goods tend to decelerate or decline during such periods.

Conversely, sectors that include companies offering essential services or goods for which consumer demand tends to vary little with price typically outperform late in the cycle. Having said that, there are certain companies that are doing things very well and beating down competition regardless of the sector they’re in.

TOP PICKS

LULULEMON (LULU.O)
Recently purchased on Sep. 19 at $154.

Lululemon is a sleeper retail name that is surprising everyone and it appears analysts and naysayers are somewhat behind the curve. fact that LULU achieved all three of its 2020 targets (EBIT margin, gross margin and e-commerce mix) two years ahead of plan speaks to the momentum in the business and strength of the leadership team. In The its earnings released this week, store comparable accelerated across almost every metric. Despite the strong upside reaction to earnings It is not too late to pick up some shares. Lululemon is a positive revision story that has lots of "run" left in it. Certainly the approval of a $500MM buyback program suggests the management team remains optimistic on its outlook.

ADOBE (ADBE.O)
Recently purchased on Jan. 8 at $230.

Adobe's leadership is driving digital transformations by enabling organizations to optimize the way they engage with their customers. Creative Cloud continues to expand to cover more aspects of design and content creation. The company is also growing its 3D content creation software portfolio.

Adobe continues to flex its pricing power in its installed base without attrition. Analysts continue to see 5 to 6 million loyal users in the install base and are seeing 1.5 million new users per year, reflecting the increased importance of design.

Adobe announced new partnerships with ServiceNow and Microsoft. In particular, the partnership with Microsoft will allows business-to-business marketers to better target accounts though integration with marketing (LinkedIn) and sales (Dynamics) solutions. This is a direct signal of its desire to elbow its way into the juggernaut that is Salesforce.

TWITTER (TWTR.N)
Recently purchased on March 20 at $32.59.

Twitter is doubling down on an effort to cater to a more niche user base rather than trying to become a universal platform. The company said the average of daily active users it can monetize on its platform rose 9 per cent to 126 million, helped by an 11 per cent gain in international users to 99 million. Margins remain lower than competitors, but cost controls continue to succeed. Stock-based compensation has stabilized, and the company continues to enjoy positive cash flow.

Recent surveys have suggested that there are improving metrics in the 18 to 29 demographic , which means more younger users are turning to Twitter. Right now the company is currently foregoing user and content growth in favour of purging suspicious users and questionable growth. These actions are a negative for short-term-focused analysts, but this “one step back, two steps forward” strategy could be exactly what the company needs to increase engagement.