Mike Newton, Director, Wealth Management & Portfolio Manager, Scotia Wealth Management
Focus: North American large caps and ETFs
We have successfully emerged from the dog days of summer where news flow was very light, which was a welcome anomaly compared to the past several summers. However, this placid backdrop is not likely to last very long.
A variety of indicators suggest that recession risks in the next six to 12 months remain muted and thus support a constructive medium-term view for global market performance. In particular, the lack of overheating pressures, solid consumer demand and labour trends along with supportive central bank policies suggest this current economic and market cycle remains well in place. In the near-term there are a variety of event risks which could trigger profit-taking following the gains of the past six months including central bank policy meetings (U.S. Fed & Bank of Japan, September 21), OPEC summit (September 26), first U.S. presidential debate (September 26), U.S. budget deadline (September 30), and IMF meetings (October 7).
Much is written about equity valuations and the seemingly high levels we are currently witnessing in North America, leading many to argue equity returns will have to fall or remain low for several years to correct the overvalued conditions.
Overall, current valuation levels are not a reason to be overly bearish on the medium-term equity market outlook. Historically, equity bull markets have always come to an end when recession risks climb to significant levels (which are not present currently). We would caution investors from “jumping the gun” and becoming overly bearish simply because stocks begin pausing. We are entering into a typically tricky seasonal period for markets with volatility levels at recent lows, suggesting opportunities could materialize in the not-too-distant future. Within this context, we would use any material weakness in coming weeks as an opportunity to put any available cash to work.
Most recent purchase: Sept. 12th at US$54.35
- Starbucks is a high-quality business with a beloved brand, stellar management and attractive growth prospects.
- The company has increased revenue for 23 of the past 24 years, and its five- and 10-year average returns on invested capital are over 20 per cent.
- It is estimated that food now makes up over 20 per cent of sales.
- Perhaps the most underrated aspect of all their recent acquisitions is their potential to position Starbucks as a premier packaged consumer goods company with distribution channels outside its coffee shops.
- With 13,000 locations in the U.S, there are still more additions coming with 600 new openings in 2016 alone including express stores and stand-alone drive-through locations.
- The company has 6,100 locations in the China/Asia Pacific region today, though it plans to increase that number to 10,000-plus by 2019. The region could rival the U.S. in store count by 2025.
Berkshire Hathaway (BRKb.N)
Most recent purchase: Sept. 7th at US$149.68
- Given its great balance sheet and defensive characteristics, Berkshire looks like a solid choice in a near record-priced stock market.
- In that regard, Berkshire's public stock portfolio was recently estimated at $130 billion, of which 70 per cent is concentrated in Kraft Heinz, Wells Fargo, IBM, Coca-Cola and American Express.
- The company remains a highly profitable conglomerate that is generating after-tax operating earnings of about $18 billion.
- Because it pays no dividend, Berkshire’s profits accrete to book value and replenish the company’s large cash balance, enabling Buffett & Co. to engage in further earnings-generative acquisitions.
- The cash balance at the core insurance operations stood at almost $62 billion at the end of June, little changed from the end of 2015 despite a $32.7 billion cash acquisition in January of Precision Castparts.
Most recent purchase: Sept. 7th at US$19.94
- Someone said that “Twitter is the world’s best pub. Too bad they don’t sell drinks.”
- With more than 305 million monthly active users and 80 per cent of revenue coming from native mobile ad formats, Twitter still represents one of the best plays on the growth of mobile.
- The street is almost uniformly “hold” on the name and the questions surrounding monetization strategies continues to dog Twitter stock, presenting investors with a reasonable valuation.
- Last week, water was poured on takeover rumours when the board signaled that no active bids are on the table.
- It remains a unique asset with strategic value (to someone) and for that reason I am recommending a small position for speculative portfolios only.
Past Picks: September 10, 2015
Walt Disney (DIS.N)
- Then: $102.60
- Now: $93.64
- Return: -8.73%
- TR: -7.49%
- Then: $45.16
- Now: $54.19
- Return: +20.00%
- TR: +20.00%
Alimentation Couche-Tard (ATDb.TO)
- Then: $60.12
- Now: $64.54
- Return: +7.35%
- TR: +7.35%
Total Return Average: +6.79%