Sep 19, 2016

Teal Linde's Top Picks: September 19, 2016

BNN Bloomberg

Teal Linde , BNN

Teal Linde, Portfolio Manager and Publisher, Linde Equity Report

Focus: North American equities

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Market Outlook: Shift in favoured sectors suggest further gains ahead

Since the Brexit vote in late June, a noticeable change has appeared in the market. Investors have preferred the most economically-sensitive sectors (such as information technology, financials, materials, industrials and consumer discretionary) while actively re-pricing defensive sectors (such as consumer staples, health care, telecommunications services and utilities) downward. This stands in stark contrast to investor preference for defensiveness for most of 2015 and early 2016.

The recent changes in flow of funds suggest investors are becoming more risk tolerant. Generally speaking, history shows that markets become more bullish once we see signs of investor behaviour moving from risk aversion towards risk tolerance. Supporting increasing investor confidence may be a growing belief that recent economic weakness is about to end and growth will move to more robust levels, or that Central Banks will have the market’s back by continuing to engage in unprecedented monetary accommodation to prop up asset prices.

Tempering expectations, however, are high valuations that may limit the ultimate strength of the rally and need to be monitored carefully. Nevertheless, recent sector rotation has been notable and bodes well for further market gains in the months to come.

Top Picks

Facebook (FB.O) – last purchased on July 27 at $122.29

Facebook is the world’s leading social-network company. It also owns the increasingly popular Instragram. Nearly half of all Internet users are on Facebook, spending 20 to 40 minutes per day on average on the site. Facebook’s growth strategy is straight forward: build the user base, increase engagement and then monetize. The company is increasingly creating a “walled garden” or “closed city” by offering additional services and conveniences that give people less and less reason to ever leave their Facebook world. Despite the company’s enormous size, Facebook grew revenues 59 per cent year-over-year last quarter. Monthly active users grew 15 per cent to 1.7 billion — its largest leap in over three years. Facebook is expected to grow revenues and EPS over 50 per cent in 2016, and 35 per cent and 28 per cent, respectively, in 2017 and 2018. Despite strong growth rates, Facebook trades at a reasonable 26 times 2017 expected EPS.

Painted Pony Petroleum (PPY.TO) – last bought on April 19 at $4.75

Painted Pony is a junior company with a senior company asset. It has the fourth largest natural gas reserves (4.6 trillion mcfe on a proved plus probable [2P] basis) among publicly traded oil and gas companies in Canada, only behind CNQ, ECA and TOU. With the completion of the Altagas’ Townsend gas processing during the summer, Painted Pony expects to ramp up its gas production from 16,600 boed last quarter to 40,000 boed by the end of 2016. At current strip prices, the company expected to generate more cash flow in Q4 2016 than all of 2015. Based in the northeast British Columbia Montney region, Painted Pony enjoys a reduced royalty rate of 3 per cent, and sells 70 per cent of its production directly to customers in British Columbia and upper-northwest United States. Painted Pony has plans to grow to 100,000 boed by the end of the decade.

The New Home Company (NWHM.N) – last bought on July 29 at $10.00

New Home is a small cap ($200 million market cap) builder of luxury homes in the $2 to $4 million range primarily within coastal Orange County, California. The company was founded by four industry veterans at the bottom of the housing market in 2009. The company also recently entered into a design collaboration with Restoration Hardware to build homes in the $4 to $5 million plus range in Crystal Cove in Newport Beach, California. Revenues are expected to grow 44 per cent in 2016 and 20 per cent in 2017. EPS is expected to fall 14 per cent in 2016, but then rise 36 per cent in 2017. New Home trades at nine times 2016 expected EPS of $1.10 and six-and-a-half times 2017 expected EPS of $1.50. New Home’s CEO and CFO have been buying shares in the open market in recent months. While its quarterly and annual results will be lumpy due to the company’s small size, New Home offers investors an opportunity to invest in an early-stage home builder.