Mohsin Bashir, Vice-President, Investments, Stone Asset Management
FOCUS: North American Large Caps

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MARKET OUTLOOK:

This market is not cheap from any angle. The S&P/TSX Composite trades at 17x and the S&P500 Index trades at 17.7x 2018 forward price-earnings multiples. That said, we are still in the wake of the largest global accommodative monetary-policy experiment ever conducted, so the goal posts that define ‘rich’ and ‘cheap’ are really just holograms until we get back to a ‘normalized’ interest rate environment and the cost of capital resumes a level similar to its historical average. For several years, velocity of money has been an issue, but as corporate purse strings loosened first toward share buybacks: $589 billion in 2015, $522 billion in 2016, and later toward technology spend and M&A, we are starting to see the business cycle resume its path forward. What is constructive is that earnings into Q1 2017 are meeting/beating expectations at a good clip and back-filling the elevated P/E multiples. As a result, we believe this market has room to run higher, but that path is likely to be turbulent given the swath of geopolitical issues forming on both land and sea

Top Picks:

CIBC (CM.TO): Recent Purchase Date: 30 March, 2017, price: $114.18

Among the Canadian chartered banks which have collectively run up 29 per cent in the past year, CIBC trades at a considerable discount to its peers at 10.7x forward 2018 price/earnings versus an industry average of 11.5x. The recent sweetening of the deal to purchase U.S. PrivateBancorp for $4.9 billion USD reinforces the likelihood of CIBC gaining a growth platform south of the border similar to its peers. Despite consistently putting up better than expected financial results, taking domestic market share, reducing costs and delivering 8 dividend increases since 2014, the market has yet to recognize the bank on equal footing in terms of relative valuation.

Altagas (ALA.TO): Recent Purchase Date: 30 January, 2017, price: $30.94

Often defined as a three-legged-stool, Altagas is an evenly split business mix of power-generation and natural-gas cash-flows valued as an oil and gas business. ALA recently announced the $6 billion acquisition of WGL Holdings Inc. in the U.S. We decided to wait patiently and top up our position below the equity issuance price. The acquisition is expected to generate 10 per cent annualized growth over the first five years which indicates a high degree of sustainable growth for the 6.7 per cent dividend yield.

MacDonald Dettwiler & Associates (MDA.TO): Recent Purchase Date: 24 February, 2017, price: $64.79.

MacDonald Dettwiler & Associates is a global communications and information company with expertise in surveillance and satellite development. The company has been working hard at establishing itself with the correct organizational structure to pursue highly classified surveillance work with the U.S. government. The company, through its wholly-owned subsidiary, SSL MDA Holdings based out of San Francisco, CA announced with the US Dept. of Defense that they have signed a security control agreement completing an important step in the process to gain contract work in the U.S. Government Space and Defense markets.

Past Picks:  JUNE 21, 2016

The Kroger Company (KR.N)

• Then: $34.47
• Now: $30.02
• Return: -12.90%
• TR: -11.95%

Tricon Capital Group (TCN.TO) 

• Then: $8.57
• Now: $10.81
• Return: +26.13%
• TR: +29.65%

Transcontinental (TCLa.TO)

• Then: $17.85
• Now: $24.04
• Return: +34.67%
• TR: +39.78%

Total Return Average: +19.16%