Matt Kacur, president of FSA Financial Science and Art
FOCUS: North American equities

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MARKET OUTLOOK

There are some good reasons for the market being at all-time highs. The world economy is strong, interest rates are low and U.S. tax cuts are among the three biggest reasons for a strong stock market.

Given that the U.S. tax cuts are going to show up for the first time in Q1 reporting, earnings should be strong for the next couple of quarters. Therefore, the market can probably sustain these trading levels or go higher for the next six to eight months. But be ready for the next downturn in six to eight months.

The world economy can still improve, but interest rates are telegraphed to go higher by central banks and U.S. tax cuts while good for companies will create deficits and have unintended consequences down the road. Furthermore stocks are expensive, making it difficult to justify prices of many stocks. 

An early warning sign that stocks are overheated, is the fact that investors are acting skittish upon earnings releases. For instance Texas Instruments, which has been a standout stock, fell nine per cent on earnings despite rising revenue and beating expectations. We’re just heading into earnings season. If we get more reports and reactions similar to Texas Instruments, we can see a downturn sooner than our aforementioned expectation of six to eight months.

TOP PICKS

TECK RESOURCES (TECKb.TO)

Teck is a cyclical mining company that mines zinc, copper, coal, and oil and gas in Canada, the U.S., Chile and Peru. Cyclical companies are riskier than average, but can provide big rewards if the timing is right and we think the timing is right.

The company is in the midst of a cyclical upturn in return on invested capital (ROIC). Our data has shown the stock to be highly correlated with the direction of ROIC. In addition to a cyclical upturn and improving return on capital, the valuation is reasonable in our valuation model.

FACEBOOK (FB.O)

Facebook, the social media giant, is our favorite of the FANG stocks. Out of this group, Facebook has produced the highest ROIC at 24 per cent, which is up from only five per cent in 2012. More impressively, Facebook was able to achieve this while adding significant capital. In 2012 the Facebook’s invested capital was $13B vs. $60B now.

In its Feb. 1 earnings release, daily active users were lighter than expected, but profitability was higher than expected. The advertising power of Facebook is top notch and should carry the stock to higher levels.  

AMETEK (AME.N)

Ametek is global provider of electronic instruments and electromechanical instruments in aerospace, power, industrial, oil and gas, pharmaceutical, semiconductor and factory automation markets. They produce ultra-precise manufacturing, test and measurement equipment such as sensors, monitoring, metering, programmable power and electrical test equipment.

This is a good “automation” play. They’ve a long track record of high ROIC, posting more than 18 per cent since 2010. The valuation is reasonable and they have a strong balance sheet.

PAST PICKS:  MARCH 13, 2017

RESTAURANT BRANDS (QSR.TO)

• Then: $73.62
• Now: $73.50
• Return: -0.16%
• Total return: 0.82%

ALGONQUIN POWER (AQN.TO)

• Then: $12.39
• Now: $12.86
• Return: 3.79%
• Total return: 8.50%

GENERAL DYNAMICS (GD.N)

• Then: $191.56
• Now: $224.36 
• Return: 17.12%
• Total return: 19.08%

Total return average: 9.46%