Rob Lauzon, deputy chief investment officer, Middlefield Capital Corporation
Focus: Global equities

MARKET OUTLOOK

The market rallied for a fourth consecutive month in April, lifting the S&P 500 to new all-time highs. The main tailwinds that have supported risk assets are still present, but aren’t as pronounced as in recent months. Monetary policy remains accommodative although the Federal Reserve recently dismissed the possibility of an “insurance” rate cut. As a result, there’s been some weakness in equity markets, indicating investors were pricing in that possibility to some extent.

The U.S. trade negotiations with China have hit a snag since the end of April and this has resulted in significantly increased market volatility. Although we believe both parties are highly incentivized to do a deal, it could be several weeks before an agreement is reached.

Aided by reduced forecasts from the analyst community, earnings for Q1 2019 have generally exceeded expectations. S&P 500 sales growth was 4.8 per cent and earnings grew by 1.7 per cent, a positive surprise relative to estimates. While our outlook for equities remains positive, we aren’t expecting significant multiple expansion from current levels.

We continue to believe that equities will move higher as trade talks improve. That said, we recognize that the current situation is tenuous and that equities may trade sideways until we get some kind of resolution. As a result, we believe that 2,900 might serve as a temporary ceiling for the S&P 500 while 2,800 may provide support. Economic relations are front and center, but earnings growth should re-emerge as the main driver of stock prices later this year.

TOP PICKS

ALPHABET (GOOGL.O)
Purchased this month $1,145.

Alphabet remains one of our favorite technology companies. Android and YouTube have a combined total of 4 billion users while Chrome, Maps, Search, Play, Gmail and Drive each have another 1 billion. Those users spend 40 minutes per day on YouTube and make 1.4 trillion search queries per year. These properties will continue to drive the company’s core advertising business. In addition, they will provide funding for the company’s ventures, some of which we believe will become great successes over time such as Waymo.

AT&T (T.N)
Purchased in first quarter at $31.25.

We’re confident that AT&T will continue to pay investors its dividend to wait until it eventually reaches its deleveraging goals. The company still has issues in traditional TV, but we believe that investors will soon shift their focus away from that and towards its new streaming service, which is set to launch later this year. In our view, the market has yet to appreciate the full value of the assets acquired in the Time Warner deal. Game of Thrones just finished, but HBO is still the king of content creation.

ARC ENERGY (ARX.TO)
Purchased April $8.90.

ARC has over 20 year record of superior capital allocation since its IPO in 1996. Recent share price weakness due to its upcoming removal from the MSCI Standard Index represents a buying opportunity. Investments this year will translate into double digit production per share growth in 2020 supporting its dividend yield of over 7 per cent.

PAST PICKS: MAY 3, 2018

TRANSALTA (TA.TO)

• Then: $6.88
• Now: $8.77
• Return: 28%
• Total Return: 30%

ZENDESK (ZEN.N)

• Then: $52.08
• Now: $86.80
• Return: 67%
• Total Return: 67%

DIPLOMAT PHARMACY (DPLO.N)

• Then: $21.04
• Now: $5.20
• Return: -75%
• Total Return: -75%

Total return average: 7%

WEBSITE: www.middlefield.com