Full episode: Market Call for Friday, March 23, 2018
Hap Sneddon, chief portfolio manager at Castlemoore
Focus: Technical analysis and macro portfolio strategy
The current market structure reflects a positive pro-growth and rising inflation view, with financials, energy, materials, discretionary and industrials and now Canadian technology showing strong relative strength while defensives and interest-rate sensitive sectors such as utilities, bonds and consumer staples show weaker.
The underpinning for this situation is based on expectations on economic data, inflation, and major central banks rate path and speed.
On the plus side, housing, jobs, inflation (growth) and earnings data are decent, but there’s more backfilling required as retail sales, total hours worked, real wages and manufacturing come in weak or declining.
The two biggest inputs to price increases (housing and wages) are a bit of a mixed bag, but are generally supportive of growth. In Canada housing sales are down, yet prices are up for the most part. In the U.S., housing has seen a recovery just under or over their 2007 highs depending on the region. Wages aren’t inflationary today, but tight labour markets and minimum wage increases across Canada will work into prices eventually.
Rising rates at the U.S. Federal Reserve (the Bank of Canada is trying its best) were quietly a watershed event eight months ago well before the markets began pricing them in. Time will tell how this second phase of central bank experiments plays out and if they’re appropriately getting in front of the curve or trying to manufacture investor consensus.
If we’re yet early for rate normalization (that businesses, governments and individuals really can’t handle a steady march higher in rates), there will be opportunities in the next few months in defensive and interest-rate sensitive securities as rates weigh on the market, and eventually, the economic cycle.
Bought on Nov. 17, 2017 at $29.29.
AltaGas has been beaten up a little due to some company-specific issues and, more importantly, natural gas prices and the yield curve. Recent earnings were in-line, though cost of capital assumptions were raised from the halt of an asset sale. The company trades at a discount to its peers due to “execution risk” on the company’s $2 billion of assets to fully fund its WGL Holdings purchase. This risk has been exacerbated by the push up in rates. The company recently raised its dividend, providing confidence to investors that the distribution is safe. It (and defensive securities in general) represents a look past the pro-growth and inflation mountain.
Bought on March 23 at $98.37.
The drop Thursday from a setback in the development in its lung cancer drug, Rova-T, represents a buying opportunity in AbbVie. The company reported Q4/17 earnings per share (EPS) of $1.48, a beat compared to consensus estimates of $1.42, and sales of $7.74 billion compared to $7.53 billion. AbbVie raised 2018 sales guidance to "approaching $32 billion" (vs. $30.83 billion consensus) and significantly raised 2018 EPS guidance to $7.33 to $7.43. Healthcare is one of the few sectors in secular bull markets.
KIRKLAND LAKE GOLD (KL.TO)
Bought on Dec. 12, 2017 at $17.56.
This gold company is a standout in a sector that has taken few prisoners. Recent earnings were in-line and well received, but the highlights were the resource and reserve update for year-end 2017, with reserves increasing 31 per cent year-over-year. With cash costs at $481 per ounce and production increasing, Kirkland is a quality name that’s out ahead of a move in the rest of the gold complex.
PAST PICKS: JUNE 30, 2017
ROYAL BANK (RY.TO)
Quality Canadian financial name; recent earnings beat, dividend increase and share buyback announcement.
- Then: $93.92
- Now: $99.93
- Return: 6.39%
- Total return: 9.29%
MATERIALS SELECT SPDR FUND (XLB)
Sector part of the pro-growth theme. Has DowDuPont, Praxair, Freeport McMoRan, Air Products and others.
- Then: $53.81
- Now: $57.08
- Return: 6.07%
- Total return: 7.57%
SNC is still trading at an exceptional discount to its peers. The stock is range bound, but look out above.
- Then: $56.07
- Now: $55.73
- Return: -0.60%
- Total return: 0.90%
Total return average: 5.92%
CastleMoore Canadian Equity Fund
Performance as of: Dec. 21, 2018
- 3 Month: 4.21% fund, 3.67% index
- Annual ROR (2012): 8.32% fund, 5.89% index
- Average drawdown: -4.12% fund, -8.27% index
- Average recovery (mths): 6.9 fund, 15.7 index
* Index: TSX Composite
* Returns are net of fees
TOP HOLDINGS AND WEIGHTINGS
- The Stars Group Inc: 7.2%
- AGF Management Ltd: 7.2%
- Suncor Energy Inc: 6.8%
- Open Text Corp: 6.6%
- Industrial Alliance Ins & FinServ Inc: 6.4%