Apr 23, 2018

Barry Schwartz's Top Picks: April 23, 2018

BNN Bloomberg

Barry Schwartz , BNN

Barry Schwartz, chief investment officer at Baskin Wealth Management
Focus: North American large caps

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MARKET OUTLOOK

In the two-year period from January 2016 to January 2018, the S&P 500 Index had only one month in which it dropped as much as 1 per cent. That’s a remarkable and unprecedented record of stability. During that time span, the market rarely moved either up or down more than 1 per cent per day, and for the chart-watchers, never once dropped below its 200-day moving average price. This wasn’t normal. Investors have forgotten that “normal” is a correction every 18 months and three to five drops a year of 3 to 5 per cent. As Warren Buffett famously said, in the short term stock markets are voting machines, but in the long term, they’re weighing machines. By this, he meant that reason and analysis always take a backseat to rhetoric and headlines on a day-to-day basis, but that the daily noise becomes insignificant over time.

Starting this week, major corporations will begin reporting their earnings for the first quarter of the year. That’s when the weighing starts and when the signal becomes louder than the noise. We expect to see strong gains in both revenues and earnings in the most recent quarter, and we believe that this is the information from which we can best calculate the value of the stocks we own. We expect a very solid year for corporate earnings, especially in the U.S. Corporations are expected to be very generous with their share buyback and dividend payout programs. We don’t know what the markets will deliver this year, but we believe it’s a great time to be a long term shareholder.

TOP PICKS

AXALTA COATING SYSTEMS (AXTA.N)
Next 12 months price-to-earnings (NTM P/E): 23 times. Enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA): 11 times

Axalta provides industrial paints and coatings for new cars, refinish paints for body shops and for a number of industrial customers. Axalta sells high-performance premium coatings and its customers wouldn’t dare think of switching suppliers even to save a few dollars. We think that the shares are attractive at a roughly 8 per cent free cash flow yield and that the company uses a thoughtful approach to allocate its free cash. The coatings industry is also consolidating and, as the fourth largest company in the coatings space, Axalta is an attractive takeover target.

MARKEL CORPORATION (MKL.N)
NTM P/E: 32 times. Price-to-book (P/B): 1.7 times.

Given the unbelievable success of Warren Buffett’s Berkshire Hathaway, it’s surprising to us that more companies haven’t tried to replicate its business model. There will never be another Warren Buffett, but Markel is sure trying its hardest to follow along the same path. Markel has copied Berkshire’s plan to a tee: Run specialty insurance and reinsurance company with discipline and a focus on profits, not volume. Invest in quality U.S. publicly traded securities instead of only bonds. Buy and operate private businesses involved in manufacturing and services as well.

FERRARI (RACE.N)
NTM P/E: 30 times. EV/EBITDA: 17 times.

We think Ferrari is one of the best businesses in the world. Even if you want to buy a Ferrari today, good luck to you: The waiting list is over a year-long, Ferrari isn’t an automaker, but a luxury goods company that has an ambitious plan to double its earnings over the next five years. We believe it’s achievable with increased production, new product lines, price increases and margin growth.