Full epsiode: Market Call Tonight for Monday, October 30, 2017
Hap Sneddon, chief portfolio manager and founder of Castlemoore Inc.
FOCUS: Technical analysis and macro portfolio strategy
The current market structure reflects a positive pro-growth view, with financials, energy, materials, industrials and technology showing the strongest relative strength, and defensives and interest-rate sensitive sectors such as utilities, consumer staples and consumer discretionary showing as the weakest.
Part of the underpinning for this situation is based on economic data. The other part is cues from global central bankers to investors that rates are going higher. GDP prints in Canada and the U.S. have been decent as of late, though we and Governor Poloz expect some weakening ahead due to the strength of the loonie. Housing has paused in Canada and bounced up under the 2007 highs in the U.S. In both countries employment gains have been positive, though the data is still underwhelming for both when it comes to wage increases. Net-net we are still not seeing inflation pick up to warrant a continuing full steam ahead on rates, and thus look out only six months at present for the cyclical rally to continue.
As we have seen and will see in the months ahead with the Bank of Canada, raising rates has the possibility of “breaking something” without clear, persistent and meaningful increases in business activity and wages despite good corporate profits. We may yet be early for a complete normalization of rates, and thus will be looking over these next six months for opportunities in securities that run counter to sectors showing current strength.
In the near term, markets are susceptible to short-term shocks from many sources – China debt, U.S. and European politics, North Korea et al – but are expected to recover briskly from the strength of the mentioned underlying trends.
Last purchase on February 5, 2017 at $31.30.
Recent earnings were above consensus, low-double digit EBITDA growth in 2017 over 2016 was reaffirmed, debt was reduced slightly bringing down leverage closer to peers, and the dividend was raised 4.3 per cent, calming investors concerned with the WGL acquisition. The stock offers a good risk-to-reward, with a near-term stop at $27.00 and longer term upside to $35.00. While the company can be placed in a defensive category, the current valuation offers shorter term upside that other names in this area do not, and the business has the ability to cut through any soft economic patches a year out due to a current high distribution stream.
SPDR SELECT SECTOR MATERIALS ETF (XLB.US)
Last purchase on June 30, 2017 at $53.72.
The materials sector has been one of the strongest areas in the last several months, and it will continue to ride the coattails of the pro-growth investment theme underway. In this ETF investors get exposure to some of the largest basic materials companies such as DowDupont, Praxair, Sherwin-Williams, and International Paper - most of which show very strong individual prospects. The sector has very positive future earnings expectations and a clearly bullish technical analysis. Too, it tracks the S&P quite well and thus can be a telltale for general economic conditions and the cyclical narrative.
ROYAL BANK OF CANADA (RY.TO)
Last purchase on July 5, 2017 at $95.14.
While there may be concern that excitement from margin expansion shades out the impact of higher borrowing costs on consumers, and businesses to a degree, it is not yet time for that reconciliation. Refinancing numbers in the near-term are quite acceptable, making this stalwart of Canadian financial services and the pro-growth charge a leader over the next six months. The August earnings announcement reveals the company continues to deserve its premium valuation over its peers from its superior business platform and EPS growth expectations.
PAST PICKS: AUGUST 18, 2016
FAIRFAX FINANCIAL HOLDINGS (FFH.TO)
- Then: $725.01
- Now: $673.71
- Return: -7.07%
- Total return: -5.08%
COSTCO WHOLESALE (COST.O)
- Then: $161.23
- Now: $160.32
- Return: -0.56%
- Total return: 4.71%
- Then: $48.33
- Now: $49.32
- Return: 2.04%
- Total return: 6.74%
TOTAL RETURN AVERAGE: 2.12%
Castlemoore Canadian Equity
Performance as of: September 30, 2017
3 Month: 3.08% fund, 2.98% index
3 Year: 13.29% fund, 4.50% index
Average annual return: 9.23% fund, 6.07% index
Drawdown: -4.12% fund, -8.27% index
Recovery: 5.2 months - fund, 15.7 months - index
*dividends are reinvested
TOP HOLDINGS AND WEIGHTINGS
- AGF Management: 7.4%
- Avigilon Corp: 7.1%
- Suncor Energy Inc.: 6.8%
- The Stars Group Inc.: 6.6%
- Kelt Exploration Ltd.: 6.5%