David Driscoll, president and CEO, Liberty International Investment Management Inc. 
FOCUS: Global Equities
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MARKET OUTLOOK
Back in 2009 at the market bottom, an investor could buy $1 of profits for $6 to $10. Today, depending on the stock, you’d have to pay $15 to $50 for $1 of profits. Have corporate profits improved so much to substantiate paying such a high premium? I don’t believe so, as we’ve seen price-earnings (P/E) multiple expansion thanks to ultra-low interest rates and the rise of passive investing (now 18 per cent of all market trading volumes and going higher).

Consider an investor in an index fund like the S&P 500 Spider Index (SPY). When the investor buys the ETF, the ETF company then has to purchase equal amounts of all 500 stocks in the index, regardless of each stock’s valuation.

And with a recent rise in interest rates in both Canada and the United States, bond yields are beginning to equal dividend yields. For example, BCE Inc. long-term bond yields are inching closer to the dividend yield of its stock, meaning common shareholders are getting bond-like returns but are taking on equity-like risk. This puts any interest-sensitive stock in these sectors at risk: Telecoms, utilities and real estate investment trusts (REITs). It’s now better to buy the bonds than the equity in these sectors – if the market corrects, the bondholders retain their value while the equity investors lose theirs.

Investors should be careful when entering the market today. There’s nothing wrong with buying a half interest in a stock position. For example, if you usually allocate $10,000 to a stock position, consider buying $5,000 worth and keeping the rest in cash. If the market continues higher, you still participate in the rally. However, if the market ever corrects, you’ll have cash available to take advantage of better buying opportunities, a much more prudent situation to be in than to be fully invested.

TOP PICKS

A.O. SMITH CORP (AOS.N) (Market Cap of $10.4 billion USD)
makes residential and commercial water heating and water treatment equipment. The company distributes is products worldwide, mostly in North America, China and India.

A.O. Smith benefits from growth in the US construction industry, a move to more water efficient appliances and growth in the middle class in China and India who are buying water purification systems and water heaters for the first time. China is poised to become a $1 billion sales market for A.O. Smith in the next few years and India in the years thereafter, thanks to the introduction of a Goods & Sales Tax (GST) in an effort by the Indian government  to modernize the economy and grow government revenue by increasing the reliability of tax collection. This should help boost domestic consumption.

Last purchase was on July 20th at $56.68 USD. I have owned the stock since 2013, my household owns it and the firm’s clients own it. We have no investment banking arrangements with the firm.

TOROMONT INDUSTRIES (TIH.TO) (Market Cap of $4.5 billion CAD) 
Sells, rents and services Caterpillar construction equipment and power systems in Ontario, Manitoba and the Maritimes. They also have a refrigeration subsidiary (CIMCO) that provides compression equipment to ice rinks in North America.

Toromont added to its Caterpillar network on August 28^th with the $802 million purchase of Hewitt Group, providing it with new sales territories in Atlantic Canada. The deal should be earnings accretive and if Toromont management can accomplish a reduction in costs resulting in higher margins and profits, there should be more value in the shares.

Last purchase was on August 27^th at $50.25. I have owned the stock since 1997, my household owns it and the firm’s clients own it. We have no investment banking arrangements with the firm.

NOVO NORDISK A/S (NVO.N) (Market Cap of $123 billion USD)  
Is a pharmaceutical firm that focuses primarily on diabetes care. It has four new products out on the market that are proving to be better medicines than their competitors currently provide. Victoza is the only type 2 diabetes treatment indicated to reduce the risk of major adverse cardiovascular events (heart attacks). Semaglutide offers superior glucose control and weight loss in people with type 2 diabetes. Tresiba has a much longer half-life than Sanofi’s drug, Lantus, allowing it to be given at different times during the day, which comes in handy when people travel, are sick or forget to take it. Fiasp has received FDA approval to help Type 1 diabetes patients (juvenile diabetes) to moderate the rapid rise in blood sugar levels at meal time.

Last purchase was July 20th at $43.57 USD. I have owned the stock since 1995, my household owns it and the firm’s clients own it. We have no investment banking arrangements with the firm.

CHUBB LIMITED (CB.N) (Market Cap of $67 billion USD)
Operates as a global property and casualty insurance company. They have maintained the lowest combined ratio in the industry at 88 per cent (claims divided by premiums written), leaving them with 12 cents for every dollar of premium written to invest in the bond market (their investment portfolio is 100 per cent fixed income). Book value continues to grow at 10 per cent a year which is good for a large insurance company. The recent hurricanes, floods and earthquakes have hit Chubb with US$1.8 billion in losses. However when catastrophes occur, insurance companies just raise prices on the next policies written.

• Then: $132.35
• Now: $144.75
• Return: 9.36%
• Total return: 11.58%

GEMALTO NV (GTO.NA) (Market Cap of $3.3 billion euros)
makes security software for e-identity documents (drivers’ licenses and passports), chip payment cards, sim cards for smartphones, network authentication devices and now biometric identification (iris and fingerprint identification). The company has suffered from a disappearance in sim card sales as everyone now owns a smartphone and from the lack of traction by US banks to introduce chip technology in their credit cards. This caused the company to take a 400 million euro writedown and the shares fell accordingly. Both the CEO and CFO have left the company in the past year and it’s now time for Gemalto to prove it’s worth more than its current price. Value investors may be interested as the company trades between 10 and 12 times earnings. If the next quarter earnings remain poor, we may do some tax-loss selling to offset capital gains earned during the year.

• Then: 54.55
• Now: 36.50
• Return:-33.08%
• Total return: -32.47%

A.O. SMITH (AOS.N)

• Then: $48.61
• Now: $60.86
• Return: 25.20%
• Total return: 26.22%