Jun 29, 2017

Stan Wong's Top Picks: June 29, 2017

BNN Bloomberg

Stan Wong , BNN

Stan Wong, director and portfolio manager at Scotia Wealth Management

Focus: North American large caps and ETFs
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MARKET OUTLOOK
As we head into the summer months, U.S. equity markets continue to inch higher with all three major indices south of the border marking new highs just last week. While valuations are somewhat extended for U.S. equity indices, steady corporate earnings momentum could help stocks grind even higher. If proposed tax reform and deregulation policies eventually become law later this year or next, this would further act as a positive catalyst for U.S. equities.

Here in Canada, the TSX has been caught in a sideways trend since the beginning of the year but could stage a recovery in the second half of the year with its two largest weighted sectors leading the way. With oil prices bumping near the bottom of its trading range, energy stocks could form a countertrend rally while rising interest rates could help financial stocks recover. Indeed, the energy and financials sectors have been underperformers year-to-date and represent a combined nearly 55 per cent weighting in the TSX.

From a global perspective, economic growth and earnings forecasts continue to improve in all major regions. In Europe, political risks are substantially diminished while GDP accelerates and corporate earnings expand for the first time in six years. Across Asia and emerging markets, the earnings backdrop also appears encouraging with economic reforms providing support. Looking at valuation metrics, international equity markets are presently more compelling than North American equity markets and provide investors with an attractive opportunity to add to positions overseas.

In Stan Wong Managed Portfolios, we are overweight in the financials, technology and consumer discretionary sectors while underweight defensive areas such as utilities, real estate and consumer staples. We also generally favour high-quality stocks and expect dividend growers to outperform dividend payers. We are balanced between growth and value stocks but expect value stocks to outpace growth stocks moving forward as interest rates move higher. Looking ahead, we are adding to international equity markets as we expect these positions to generally outperform North American equity markets given the valuation discounts. Lastly, we note that volatility measures are currently near lows so while we are very constructive on equities over the intermediate term, we are prudently cautious when putting new money to work.

TOP PICKS

CITIGROUP INC. (C.N) – Last purchased this month at approximately US$61
Citigroup is a diversified financial services holding company that provides a broad range of financial services to consumer and corporate customers in over 160 countries. Over the medium term, Citigroup shares look to benefit from rising interest rates and a lighter regulatory environment. Citigroup’s potential for large shareholder capital returns also makes the shares attractive. Just yesterday, the company announced a doubling of its quarterly cash dividend and a massive US$15.6 billion share buyback program over the next year. Citigroup is recapitalized and appears refocused under new management. Additionally, Citigroup’s acquisition of Costco’s co-branded credit card portfolio (in the U.S.) last year continues to pay off. Longer term, Citigroup's global presence differentiates the bank from nearly all of its peers. With significant revenue coming from Latin America and Asia, the bank is poised to benefit from the growth of these economies over the next decade. The bank’s global diversification provides a distinct advantage to some of its competitors. Today, Citigroup’s valuation continues to look attractive with a price-to-book ratio of 0.88x, a notable discount to its peer group.

COSTCO WHOLESALE CORP. (COST.O) – Last purchased this month at approximately US$160
Costco is the world’s second largest retailer by revenue and operates over 700 membership warehouses worldwide. With approximately 90 million member cardholders, Costco leads big-box retailers because of its ability to attract upper-income households with high-quality products, low prices and unique shopping experiences. Indeed, the membership renewal rates are over 90 per cent in North America and 88 per cent internationally. Same-store sales have improved with traffic growth, defying overall retail trends. Future improvement in the online shopping experience for Costco members should help fend off competitors. As well, Costco’s use of staples (fresh food and gasoline) as loss leaders should allow them to preserve market share. The recent stock price reaction to Amazon’s announcement to acquire Whole Foods appears overdone and provides investors with an attractive buying opportunity given Costco’s solid growth story and strong global brand.

TENCENT HOLDINGS LTD. – ADR (TCEHY.PK) – Last purchased this month at approximately US$34
Tencent Holdings Ltd. is a Chinese investment holding company providing Internet and mobile value-added services (VAS), media, entertainment, payment systems and online advertising services in China. Today, Tencent Holdings is the world’s fourth largest Internet company by revenue and fifth largest by market capitalization. Mobile gaming remains Tencent’s main growth driver while ad sales are quickly expanding due to its social media application’s (WeChat) 938 million monthly active users and high level of engagement. The company has a solid balance sheet with over US$20 billion sitting in cash. The company provides a compelling growth story with an estimated long-term earnings per share (EPS) compound annual growth rate (CAGR) of over 25 per cent. Simply put, investors in Tencent Holdings Ltd. own a stake in one of the fastest-growing business industries in one of the fastest-growing regions in the world.