John Burke, president at Burke Financial Strategies

Focus: U.S. equities
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MARKET OUTLOOK
The U.S. market is lulling investors to sleep with volatility near record lows. Further, the S&P 500 is now almost exactly where it was at the end of February, meaning investors have not made any money in U.S. stocks since then. Canadian stocks have not fared any better. In fact, Canadian stocks are almost exactly where they were at the close of 2016. 

The overseas story is much brighter. The MSCI EAFE index, which basically tracks ex-U.S. developed stocks, is up almost 13 per cent since the end of the year, and the emerging markets’ index is up almost 15 per cent since the end of the year (figures do not include dividends).

The U.S. economy is slowing down. Europe is speeding up. Emerging markets are speeding up. U.S. valuations are stretched after nine years of outperforming MSCI EAFE and five years against emerging markets. Further, the electoral mood seems to have shifted towards the economy in Europe. And European stocks have more exposure to emerging markets than their American counterparts.

We think the trend is early.

TOP PICKS

HENKEL (HENKY.US)
Henkel is a German company with a $55 billion market cap. They make consumer products like Dial soap and Purex laundry detergent and rank fourth in the world in consumer products. They also make adhesives for the industrial markets where they supply to companies like General Motors, one of their biggest customers. With only 22 per cent exposure to North America, this company is well positioned for the early pick-up in growth in Europe and emerging markets. They have been consistently profitable. The six per cent free cash flow yield should lead to dividend growth from the current 1.23 per cent rate.

WAL-MART (WMT.N)
Amazon is changing the retail landscape by moving sales to an e-commerce world. You could buy Amazon and pay 142 times earnings or you could buy Wal-Mart, which is adapting to e-commerce and pay 17 times earnings with a 2.7 per cent dividend and a free cash flow yield of about 10 per cent. Unlike many retailers, Wal-Mart can and does compete with Amazon and wins when it comes to prices. Further, their new curbside pick-up service is now available in over 600 stores. In a sampling during April, our analysts in April found that a 33-basket sample of brand-name products was significantly cheaper at Wal-Mart than Amazon. 

ARRIS (ARRS.O)
This stock is not for income-oriented investors as it does not pay a dividend. However, their high free cash flow yield may soon lead to dividends. The company reported earnings that moved the stock up from 25.30 before earnings to 27.73 currently. Tech earnings have been leading the way. This tech company makes hardware and services for networking and cloud, and their equipment even powers TVs for millions of people around the globe. The stock started trading less than two years ago. Customers include Comcast, AT&T and Amazon.
 

PAST PICKS: MAY 11, 2016

TIME WARNER (TWX.N)

• Then: $74.14
• Now: $98.68
• Return: +33.09%
• TR: +35.64%

OCCIDENTAL PETROLEUM (OXY.N)

• Then: $76.31
• Now: $60.92
• Return: -20.16%
• TR: -16.67%

AMERIPRISE FINANCIAL (AMP.N)

• Then: $95.17
• Now: $128.57
• Return: +35.09%
• TR: +39.06%

TOTAL RETURN AVERAGE: +19.34%