Aug 23, 2016

Zachary Curry's Top Picks: August 23, 2016

BNN Bloomberg

Zachary Curry , BNN

Zachary Curry, COO and Portfolio Manager, Davis Rea
FOCUS: North American Large Caps

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MARKET OUTLOOK:

Global economic growth is turning upward, with the U.S. and emerging markets leading. Chinese and Japanese growth is bottoming and the U.K. and euro area is slowing. Canada is lagging badly, but will get dragged along by better global and U.S. growth. Earnings growth is expected to follow economic growth upwards.

Inflation is likely to remain low outside a temporary lift from higher energy prices. An improving global economy is a plus for commodity prices, which are expected to be higher over the remainder of this year. Rising commodity prices are expected to push the Canadian dollar up further, likely above 80 U.S. cents.

Short-term interest rates are expected to remain low for extended period with the Bank of Canada locked at 0.5 per cent for indefinite future. The U.S. Fed is likely to nudge rates up by 50 basis points over the coming year. Negative rates will persist in continental Europe and Japan and the U.K. policy rate could fall to zero.

Ten-year government bond yields are likely to remain in a very low trading range. An upward move toward the top end of the trading range is expected over second half of 2016 with an improving economic and earnings backdrop a plus for corporate bonds. Financial metrics are favourable for Canadian corporations and Canadian corporate bond spreads remain above average for both investment grade and high yield bonds, suggesting favourable valuations for investors.

The bear market is over. Economic and earnings backdrop are turning favourable for equities. Monetary policy settings remain supportive for equity valuations and an improving economic backdrop argues for the economically-sensitive, or cyclical sectors to outperform. This argues for increased weightings in resources, industrials, technology and consumer discretionary at the expense of utilities, consumer staples and telecom. The U.S. healthcare sector is traditionally a defensive sector, but it has lagged the overall market, is relatively cheap in rich markets and has a very favourable long-term outlook in an aging world. It appears poised to do very well for the balance of 2016. The S&P/TSX is likely to outperform the S&P500 in C$ terms for the remainder of 2016.

Top Picks:

Keyera (KEY.TO)

Most recent purchase: May 17, 2016 at $36.35. Keyera Corp. is involved in natural gas gathering & processing as well as natural gas liquids processing, transportation, storage and marketing. Keyera has an excellent management team that has consistently delivered strong results over the years. The shares currently yield almost 4 per cent with the company recently increasing its dividend by 6 per cent, and Keyera’s payout ratio is low at 49 per cent for the last quarter. The company recently announced an agreement with a large producer to build a gas processing plant, the first phase to be in service in 2019, as well as increasing its ownership position at another facility. The balance sheet remains strong, with leverage ratios much lower than their peers.

Cerner (CERN.O)

Most recent purchase: June 23, 2016 at US$56.84. Cerner Corporation is a worldwide supplier of healthcare technology solutions and services to healthcare organizations such as hospitals, pharmacies and ambulatory centres. The company’s solutions optimize processes such as patient intake, treatment workflows, and insurance reimbursement to increase efficiency and reduce errors. The company is in strong financial shape, focuses on growing organically and has been generating record order backlog for their products. It recently purchased Siemens’ Healthcare IT portfolio, and has grown revenue at 14 per cent annually and operating earnings 22 per cent annually over the last 10 years, with a majority of that growth generated organically. In the near term, Cerner will be a beneficiary of new reimbursement models related to quality of care, and changing health care regulations in the U.S. to mandate meaningful use of technology and electronic health records which should be a tailwind for the company. Cerner should also benefit from industry consolidation and the replacement cycle of technology to expand their footprint as the largest health care IT provider. In the longer term, there is opportunity to expand internationally as 88 per cent of sales are currently based in the U.S.

Celgene (CELG.O)

Most recent purchase: June 23, 2016 at US$100.08. Celgene is a global biopharmaceutical company, focusing on the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases. Celgene is one of the best capitalized large cap biotech names with a strong pipeline for growth. Its success has been largely driven by their blockbuster multiple myeloma franchise which continues to have a long runway for growth as they continue expanding the number of indications that the drugs can treat, increasing duration of treatment, and continue expanding distribution of their products into international markets, all of which bode well for product revenue. Celgene has forecasted double digit growth through to 2020 on the back of both its multiple myeloma franchise and its deep pipeline of products. Its research and development efforts are driven through partnerships with 25 other biotechnology companies to develop new treatments in areas such as Crohn’s disease and ulcerative colitis, but also through the two acquisitions that were completed last year to expand their business into multiple sclerosis and other cancers. They now have four drugs on pace to generate revenues in excess of $1 billion this year, with more data releases from other studies anticipated later this year. We believe Celgene to be one of the cleanest growth stories in the biotechnology and healthcare space, which has been out of favor as of late, with a healthy balance sheet and strong free cash flow generation.