Jan 12, 2017
Mohsin Bashir's Top Picks: January 12, 2017
BNN Bloomberg
Mohsin Bashir, vice president and portfolio manager at Stone Asset Management
Focus: North American large caps
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MARKET OUTLOOK
The winds of change are circling. There is more fundamental optimism surrounding earnings growth. We exited an earnings recession in the middle of 2016 and that trajectory continues to look healthy, bolstered by a recovering commodities sector. Many strategists and pundits have used the term “uncertain” to describe this market environment, but I think that speaks to people’s apprehension with respect to how modifications to international trade policy can impact global GDP. We believe that the U.S. will travel a path to become more self-sufficient in its manufacturing processes and that should bode well for cyclical sectors and inflation. Extended low interest rates have resulted in perverse valuation premiums for bond-proxies such as REITs, telcos and utilities. We believe the sun has set on those areas.
Overall, the corporate sector continues to hold its own and thanks to cost cuts and healthy balance sheets, businesses can be spring-loaded to deliver earnings growth in the coming years. Growth of earnings in 2017 is expected to track approximately seven to eight per cent, which is an accelerating pace relative to years passed. Forward P/E valuation of the S&P 500 index stands at 17.5x, which is not cheap, but the growth rate of earnings can catch up (or possibly surpass) the pace of stock prices. However, there are “uncertainties” that could be catalysts for acute market corrections, and risk management will be very important. As difficult as it is to find attractive valuations at the moment, our preference is for seeking out serial growers of dividends; but we recognize that a pick-up in merger and acquisition activity is a healthy sign of growth, and we have thus tilted our portfolio to participate accordingly.
TOP PICKS
BANK OF AMERICA (BAC.N) – Most recent purchase: $20.15/share on November 28, 2016
Management has taken the necessary steps to simplify the company, streamlining the number of products by 70 per cent across loans, deposits and cards. Non-interest expense costs have come down 25 per cent from $72 billion in 2011 to $55 billion in the last 12 months. Bank of America ranks #1 in deposit market share, home loans, online banking and mobile banking functionality. Amid an improving housing backdrop in the U.S. and a more optimistic outlook from small businesses and loan growth states-side, BAC stands to win significantly if the re-inflation of the U.S. economy moves forward. Add to that the prospect of several rate hikes from the Federal Reserve, which adds re-investment tailwinds to net-interest margins as well as the possibility of less constricting regulations, and it is quite possible for this stock to cross $30/share. While the yield is small at 1.3 per cent relative to Canadian counterparts, the company should generate higher cash flows, leading to improved dividend growth in the years ahead. Current payout ratio stands at an extremely healthy 15 per cent.
WHITECAP RESOURCES (WCP.TO) – Most recent purchase: $11.64/share on November 25, 2016
Whitecap is an oil-weighted exploration and production company in Western Canada (Alberta and Saskatchewan). It is on track to grow its production from 45,000 boe/d (75 per cent oil) to 55,000 in 2017 and 58,000 by 2018. It is a strong player in the core areas of West Central Saskatchewan (Dodsland-Viking light oil), West Central Alberta (Pembina/Garrington cardium light oil) and Peace River Arch (Valhalla Montney oil). The company has grown by both the drill bit and via acquisition, as with their recent purchase of Husky’s assets in Western Canada. We recently met with management and were impressed with their long-term growth plans and financial flexibility.
TRICON CAPITAL (TCN.TO) – Most recent purchase: $8.65/share on May 24, 2016
Demographics in the U.S. Sun Belt indicate secular tailwinds for single-family rental properties as millennials increasingly choose to prioritize experiences over asset-accumulation. Tricon Capital Group is an asset manager and principal investor focused on the residential real estate industry with over 21,000 single-family rental properties in this “hot” region. Market cap of $1.1 billion. Operates four segments: Tricon Housing Partners, Tricon American Homes, Tricon Lifestyle Communities, and Tricon Luxury Residences representing $2.8 billion in AUM. Tricon American Homes segment represents 50 per cent of Tricon’s book, which bodes to be a good source of net-asset-value (NAV) growth as margins expand through scale and refinement in operations. Trades at over 20 per cent discount to its NAV of $13/share. Payout ratio 70 per cent, yielding 2.7 per cent. Analyst revisions and relative valuation are attractive given the tailwinds forming for southern U.S. growth.
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
BAC | Y (via Fund investment) | N | Y |
WCP | Y (via Fund investment) | N | Y |
TCN | Y (via Fund investment) | N | Y |
PAST PICKS: FEBRUARY 25, 2016
MANULIFE FINANCIAL (MFC.TO)
- Then: $17.53
- Now: $24.22
- Return: +38.16%
- TR: +42.24%
GILDAN ACTIVEWEAR (GIL.TO)
- Then: $34.23
- Now: $32.72
- Return: -4.41%
- TR: -3.34%
STRYKER (SYK.N)
- Then: $101.80
- Now: $122.27
- Return: +20.10%
- TR: +21.75%
TOTAL RETURN AVERAGE: +20.21%
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
MFC | Y (via Fund investment) | N | Y |
GIL | N | N | N |
SYK | Y (via Fund investment) | N | Y |
FUND PROFILE: STONE & CO. DIVIDEND GROWTH CLASS CANADA
PERFORMANCE AS OF DECEMBER 31, 2016:
- 1 month: Fund 2.2%, Index* 2.2%
- 1 year: Fund 11.3%, Index* 18.6%
- 3 years: Fund 6.3%, Index* 9.2%
* Index: 80% S&P TSX Composite, 20% S&P 500 Index
* Fund performance assumes that dividends are taken in cash and performance shown is net of fees.
TOP HOLDINGS AND WEIGHTINGS
- National Bank Financial: 4.2%
- Suncor Energy Inc.: 4.0%
- J.P. Morgan Chase & Co.: 3.6%
- Bank of America Corp.: 3.5%
- Brookfield Asset Mgmt Inc.: 3.1%
WEBSITE: www.stoneco.com