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

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MARKET OUTLOOK

It’s highly unlikely that we’ll ever see again the nine-year-and-one-month stock market run that the U.S. market delivered since the 2008 financial crisis. More likely, patient investors will compound their returns going forward at more average levels. While the recent market action may be unsettling, we believe that conditions are ripe for healthy returns vs. fixed income alternatives. Our investment approach is based on looking at the fundamentals and then making a rational decision from there. Here’s what the fundamentals tell us now:

1. When interest rates and inflation is low, stocks deserve to trade at premium levels. While rates may move up slightly this year, in context of history, rates are incredibly low.
2. The S&P 500 is trading at 17-times 2018 estimated earnings. This is below the average price-to-earnings of the last 20 years. That said, price-to-earnings ratios are not predictive of future returns. Earnings growth drive future returns.
3. Profit margins are at record levels and should increase thanks to U.S. tax reform.
4. The return on invested capital of the largest companies in the U.S. is the highest it’s ever been. Said another way, the quality of the cash flows generated by U.S. companies has never been better. As a result, these companies deserve to trade at much higher multiples of earnings than in the past.
5. There is so much cash on the sidelines. This is cash held by corporations, banks, private equity, sovereign wealth and the cash piles up every day. We expect to see lots of M&A going forward.
6. Companies like Google, Apple and Facebook are showing double-digit revenue and earnings growth, yet they trade at only slight premiums to the overall market.
7. Repatriation of capital from foreign markets will lead to significant buybacks and dividend increases for shareholders.
8. Many companies are expanding their capital expenditure budgets. This will greatly benefit the economy.

We don’t see any signs of a looming recession or a fall-off in corporate earnings or a scenario where inflation is about to skyrocket. As a result, we’re staying the course and will make changes to our holdings when we find better investment ideas. At the moment, a diversified portfolio of profitable North American equities is our best idea.

TOP PICKS

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

Brookfield Asset Management is benefitting from institutional investor’s demand to diversify funds toward real assets. It has the experience, scale and approach to successfully satisfy the demand. 

At its investor day last November, Brookfield set an ambitious target to double its intrinsic value by 2022. If history is any guide, it will more than reward long-term investors.

ALPHABET (GOOGL.O)

Alphabet has recently missed street expectations thanks to higher costs from generating mobile and YouTube search results. We think the stock is attractively valued at 25-times earnings net of $170 of cash per share. The future looks extremely bright for Google. 

Its cloud business has become the fastest-growing cloud provider, YouTube is increasingly replacing TV and it still has plenty of un-monetized properties such as Maps. The core business of digital ads also continues to grow at double-digit rates.

GOLDMAN SACHS (GS.N)

Goldman Sachs is a big beneficiary of the Trump administration, with full benefits from tax reform, the Dodd-Frank repeal and interest rate hikes. Goldman has done a good job controlling costs over the last six years while reducing the number of shares by over 20 per cent. Trading revenues may benefit if volatility improves, which it certainly has over the last few days. We think the shares are excessively cheap, given the favorable environment at 1.2-times book.  

LIVE NATION (LYV.N)

• Then: $30.89
• Now: $43.92
• Return: 42.18%
• Total return: 42.18%

VAIL (MTN.N)

• Then: $189.86
• Now: $211.86
• Return: 11.58%
• Total return: 13.24%

INTERTAPE POLYMER (ITP.TO)

• Then: $23.61
• Now: $20.65
• Return: -12.53%
• Total return: -10.32%

TOTAL RETURN AVERAGE: 15.03%

TWITTER: @BarrySchwartzBW
WEBSITE: baskinwealth.com