David Driscoll, president and CEO of Liberty International Investment Management Inc.
FOCUS: Global equities

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MARKET OUTLOOK

Are we in for a wild ride in 2018? With the S&P 500 Index currently trading at 23.14x earnings and its historical average at 16.2, one may surmise the market is 43 per cent overvalued. However, according to history, the largest market peaks in 1929 and 1999 suggest we could go another 40 per cent higher – the “melt-up phase." Unfortunately, the ride down to its historical norm after such a peak would be about 50 per cent.

So, what to do? Here are some ways to deal with today’s markets:

  • Re-balance positions when necessary – if you own a 30-stock portfolio and one of the holdings becomes greater than six per cent, sell half and allocate the cash to those positions with a weighting less than three per cent. This avoids any emotional struggle – instead it’s mechanical.
  • Pay attention to the stock’s beta – if you own stocks with betas over 1.50, it’s important to either sell outright or re-balance. That’s because if the market drops 50 per cent, these stocks could drop 75 per cent (50% x 1.5). That could destroy your capital quickly and the return to break-even could take decades.
  • Keep some money in cash. We hold 20 per cent times the equity weighting of a client’s portfolio. If the portfolio is 100 per cent equity, then we’re 80 per cent invested with 20 per cent in cash. If the portfolio is 50 per cent stocks and 50 per cent fixed income, we’d have a 10 per cent cash weighting (50% x 20%).
  • Diversify globally. If the market drops 50 per cent, the Canadian dollar will come under pressure and a global portfolio would help ease the pain. In 2008, the Canadian dollar fell 22 per cent as investors flocked from minor currencies like the Loonie to the more liquid currencies of the U.S. dollar, euro and the Japanese yen.
  • Avoid correlation risk – don’t own multiple stocks in the same industry. In 2008, it wasn’t one Canadian bank that fell 40 per cent, they all did. If you’re living off the capital and it falls 40 per cent, you could run out of money before markets recover.

TOP PICKS

David Driscoll's Top Picks

David Driscoll, president and CEO of Liberty International Investment Management Inc., discusses his top picks: Jardine Matheson Holdings, Lindsay Corporation and TransCanada.

JARDINE MATHESON HOLDINGS (JM.SP)
A multinational enterprise with a portfolio of businesses focused on the Asia-Pacific region. The group’s activities include financial services, supermarkets, consumer marketing, engineering and construction, automobile dealerships, insurance, property investment and hotels. The stock has been in a trading band between $50 and $70 for the past five years: a reflection of weak emerging market currencies. However, this has changed in the past year as the U.S. dollar has weakened. It currently trades at 14x earnings and is expected to grow its profits by about 10 per cent annually. Last purchased on January 9, 2018 at $60.41.

LINDSAY CORPORATION (LNN.N)
Makes and markets center pivot and lateral movement irrigation equipment that is designed to use water, energy and labour more efficiently than traditional flood or surface irrigation equipment. It sells to key markets worldwide – 60 per cent of sales are in the U.S. while the remaining 40 per cent are to international markets. They also own an infrastructure division that supplies movable barriers for traffic control and crash cushions for road safety. The key to this company is the advanced technology they use in their irrigation equipment to maximize output and minimize costs. Since water resources is one our key themes at Liberty, it’s a long-term investment to take advantage of the need for the global population to use its water resources wisely and efficiently. Last purchased January 5, 2018 at US$88.93.

TRANSCANADA (TRP.TO)
Focused on natural gas transmission and power services. Its network of pipeline transports the majority of Western Canada’s natural gas production to markets in Canada and the United States. It wholly owns more than 42,100 miles of natural gas pipeline – its six pipelines link the Western Sedimentary Basin to markets in seven Canadian provinces and 35 U.S. states and Mexico. It also owns a major oil pipeline (Keystone) and stakes in several other gas pipelines in the U.S., Canada and Mexico. On the power side of its business, it owns, operates or controls about 20 power plants in Canada and the U.S., with more than 11,800 megawatts of power generation capacity. The stock currently yields 4.20% with an expected annual dividend growth rate in the 8-10 per cent range. If the Keystone South project ever gets approved, the stock should recover from its recent price malaise. If not, it should still trend higher in coming years thanks to its on-going natural gas investments and increasing customer base. Last purchase was December 13 at $62.91.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
JM Y Y Y
LNN Y Y Y
TRP Y Y Y

PAST PICKS: MARCH 13, 2017

David Driscoll's Past Picks

David Driscoll, president and CEO of Liberty International Investment Management Inc., discusses his past picks: Danaher Corporation, Paychex and Dassault Systemes.

DANAHER CORPORATION (DHR.N)

Is a conglomerate focused on five areas: life sciences, diagnostics, water quality, product ID and dental. Each has high barriers to entry. The company acquires firms and changes the business structure to reduce costs and increase margins, providing solid free cash flow growth which leads to higher annual dividends and, ultimately, a higher long-term share price.

  • Then: $87.50
  • Now: $98.56
  • Return: 12.64%
  • Total return: 13.36%

PAYCHEX (PAYX.O)
Provides comprehensive payroll and integrated human resource and employee benefits outsourcing solutions for small-to-medium-sized businesses in the United States. For every quarter of a percent increase in rates, the company makes US$3M or US$0.01 a share in profits just by investing the float set for remittance to the IRS from payroll taxes. The recent corporate tax cut from 35 per cent to 21 per cent should provide Paychex with ample cash to continue raising its dividend aggressively.

  • Then: $62.56
  • Now: $66.86
  • Return: 6.87%
  • Total return: 9.50%

Dassault Systemes (DSY.FP)
Provides a variety of computer-aided design, manufacturing, engineering and product lifecycle management (PLM) software that firms use to create, model and test designs. From original idea to finished product, Dassault’s software is the creative tool. Recent acquisitions have included firms with artificial intelligence experience to further improve the design experience for their clients.

  • Then: $76.81
  • Now: $91.22
  • Return: 18.76%
  • Total return: 19.52%

TOTAL RETURN AVERAGE: 14.12%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
DHR Y Y Y
PAYX Y Y Y
DSY Y Y Y

WEBSITE: www.libertyiim.com