May 30, 2017

Mike Newton's Top Picks: May 30, 2017

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
_______________________________________________________________

MARKET OUTLOOK
Where’s that confounded correction? Nobody knows, but my bullish stance on equities has materialized as the U.S. market has continuously hit new all-time highs. Canada has been less fortunate, as the strong first half has completely escaped Canada with the TSX showing a flat YTD return. Despite the market strength, the last couple of weeks have been somewhat disappointing as internal market dynamics have begun to weaken with every new high on growing North Korean concerns, Chinese growth anxiety, and discouraging Washington gridlock. Despite this, I am still committing fresh money into the market despite a chorus of pundits calling for a correction. Why? As opposed to relying on unknown future predictions or hunches, we use stop-loss risk management as a primary element in taking us out of a position. Right now, the earnings picture is supporting continued investment. I suspect the summer months could be too quiet for some, however our portfolios are prepared for any outcome both negative and positive. Before everyone heads off to the lake, I would suggest investors take a mindful look at their personal portfolios and plot out some what-if scenarios and how they would react in an orderly manner instead of in an emotionally-charged flex-reaction. The next big market test will likely come after the summer months when the U.S. Fed could do a third rate hike combined with the Fed’s intended balance sheet reduction.

TOP PICKS

NEWELL BRANDS (NWL.N) – Most recent purchase April 3, 2017 at US$46.78
Last year, Newell completed its $15.4-billion takeover of Jarden Corp and since then has been reshaping itself. The market likes what it’s seeing as shares have gained 19 per cent so far this year.

In its latest move to pare down its portfolio, Newell Brands reached a deal to sell its winter sports business to private-equity firm Kohlberg & Co. for about $240 million. The business, which includes brands like Madshus and Völkl, generated about $330 million in sales for Newell last year, just 2.4 per cent of the company’s total revenue. Newell has been revamping its business in recent years, shifting from a holding company to an operating company with five core business segments. It has sold off several brands and acquired others. Management delivered over $400 million in savings from 2011 through 2016, and has accelerated sales growth from as low as -5 per cent in 2011 to +6 per cent in 2015. Even with its strong price performance of late, NWL is still potentially undervalued.

JPMORGAN (JPM.N) – Most recent purchase April 3, 2017 at US$86.82
Bank stocks have generally been sluggish since the start of the year and have suffered particularly in the mid-March to end-of-April period as U.S. 10-year yields retraced after moving significantly from 1.35 per cent to 2.60 per cent (from July’16 to March’17). I remain constructive on U.S. banks and believe that the recent weakness in the space has created an ideal entry point for those who missed the initial run post elections. Today's stable macro backdrop in the U.S., improvement across Europe and less concern with respect to China ought to prove supportive to banks. With its complete product set, global presence and scale, JPMorgan is my favourite name and I believe it is better positioned than most. Recent domestic U.S. data is also interesting; the average credit score nationwide hit 700 in April — the highest level since 2005, according to the creator of FICO credit scores. Meanwhile, the share of consumers deemed to be riskiest, with a score below 600, hit a new low of roughly 40 million, or 20 per cent of U.S. adults who have FICO scores.

DIGITAL REALTY TRUST (DLR.N) – Most recent purchase April 3, 2017 at $106
All of the biggest trends in tech require massive computing systems and storage. Digital Realty is the world’s largest datacenter provider with 156 different facilities under its umbrella. DLR rents space in those locations to other companies to house and hold their server computers. DLR’s impressive client list includes the like of IBM and Facebook and continues to benefit from its high occupancy level of over 92 per cent and increasing lease spreads as demand growth outpaces capacity expansion in a number of markets. Most analysts expect 20 per cent sales growth through acquisition and capacity increases. DLR’s payout has grown 20 per cent over the past five years, and the stock currently yields more than three per cent. DLR is a rare example of a stock enjoying above-average market growth and supporting a healthy dividend all at once.