Jan 23, 2018

Michael Sprung's Top Picks: January 23, 2018

BNN Bloomberg

Michael Sprung , BNN

Michael Sprung, president of Sprung Investment Management
FOCUS: Canadian large caps
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MARKET OUTLOOK

There were a lot of good reasons for investors to be happy in 2017. Global economic growth continued to accelerate to an estimated real rate of 3.6% (International Monetary Fund estimates) for the year, up from 3.2% in 2016. For the first time since 2008, the United States, Europe and China all reported strong levels of growth. Forecasts for 2018 have global real growth at 3.7%. This renewed strength in the global economy has been supported by improving levels of corporate earnings aided in part by the accommodating low interest rates that have prevailed since the financial crisis. Looking ahead, corporate profits will get another boost due to pending lower tax rates in the US. In North America, employment levels have increased above expectations without the usual corresponding wage inflation, thus far. US unemployment fell to 4.1%, the lowest level in 16 years.

Consumer spending has remained robust. Ten years is an exceedingly long time for an economic expansion to continue without a slowdown or recession. During any expansion, there are always elements in the economy that accumulate until things come to a breaking point. According to the Institute of International Finance, global debt now exceeds US$223 Trillion. Private and public borrowers have gorged on low interest rates. Investors have received little compensation for the risk they bear in fixed income securities. Borrowers and investors will be vulnerable to rising interest rates. Corporate profits could also be squeezed in this sort of environment.

Valuations have have been pushed to high levels, making future multiple expansion less likely. Investors have paid little heed to geopolitical concerns stemming from Washington, North Korea, the Middles East and elsewhere. Closer to home, we have the NAFTA negotiations. All of these factors lead us to exercise caution and prudence in the current environment.

TOP PICKS

Manulife Financial (MFC.TO) Last Purchase Sept 19 2017 @ $24.26

Manulife is a leading Canadian-based financial services group with operations in Asia, Canada and the United States. The company is well positioned in Asia where they are experiencing high growth and profitability; 50% of Manulife's core earnings stem from Asia. Under Roy Gori's leadership, a new round of balance sheet optimization is underway during which a more agressive approach to dealing with less profitable legacy businesses. Future dividend increases are likely. The stock currently yields 3.0%.

ARC Resources (ARX.TO) Last Purchase March 9 2016 @ $18.62

ARC in one of Canada's leading conventional oil and gas companies with operations in Western Canada. Management is focused on the development of ARC's high-quality
long-life assets. Liquids rich opportunities in the Montney offer the prospect of higher margins. The expansion at Dawson Phase III was completed in mid-2017. Future growth
in production will arise from completion of projects in Sunrise (mid-2019) and Dawson Phase IV in 2020. Arc has one of the strongest balance sheets amonst its peers with
net debt to cash flow below 1.5X. The stock currently yields 4.5% after ots recent pullback.

Goldcorp (G.TO) Last Purchase December 16 2014 @ $20.00

Goldcorp is one of North America's largest gold companies with a production base heavily weighted to Mexico and Chile. The Company also has assets in Chile, the Dominican Republic and Argentina. Between 2017 and 2021, management targets production growth of 20%, lowering costs by 20% and grow reserves by 20%. Cash fow should grow significantly over the next few years after which longer term assets will come into focus. The stock is attractively valued relative to its peers.