Jul 25, 2017

Norman Levine's Top Picks: July 25, 2017

BNN Bloomberg

Norman Levine , BNN

Norman Levine, managing director at Portfolio Management Corp.

Focus: North American large caps
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MARKET OUTLOOK
It has been a tough year for Canadian investors. The Canadian stock market, as represented by the S&P/TSX Composite Index, is the worst performing major market in the world. This is due to its heavy reliance on resource and financial stocks. It in no way represents the Canadian economy. If Canadian investors were smart enough to know that their market was going to do so poorly and took their money outside of Canada to invest, they got hurt by the surge in the Canadian dollar. Its rise negated most of the gains investors received outside of Canada. Rising interest rates have hurt bond returns, especially those on the shorter end of the curve. It appears the only place to have hidden was in rate-reset preferreds, as they (after years of being horrible investments) have benefitted from the rise in interest rates and the hope for further rate increases. Canada is now becoming a more interesting place to invest, especially in the energy area, as we believe oil prices are closer to their bottom than their top. Keep in mind, however, that commodity stocks are meant for trading, not for long-term ownership, as their prices tend to remain flat over most 10-year periods while being highly volatile in between. As for foreign investing (despite the fact that we think markets in general, and the U.S. market in particular, are on the expensive side) the increased value of the loonie is making investing outside Canada attractive again.

TOP PICKS

KUEHNE AND NAGEL INTERNATIONAL (KNIN.VX –SWITZERLAND): Owned by clients, self and family. Bought April 4, 2013 at SFr 102.3.
Kuehne and Nagel is the leading global logistics company incorporating sea freight, air freight, road and rail logistics, contract logistics, real estate and insurance brokerage. The logistics industry is a defensive sector with attractive growth characteristics. The company has a strong balance sheet with net cash of approximately SFr 1.7 billion and a 3.3 per cent yield with a dividend that grows each year. We expect it to benefit from the growth in import/export trade volumes between developed economies; amongst emerging and developing economies; and amongst high-growth emerging economies. It is an excellent way to play the growth in global trade. It also trades on the Pink Sheets under KHNGF (stock) or KHNGY (ADR).

ARC RESOURCES (ARX.TO): Owned by clients, self and family. Bought November 2014 at $28.55.
ARC is an oil and gas exploration and production company in Western Canada. While it operates in all four Western provinces, the majority of its assets are in the Montney play in Northeastern British Columbia. The recent sale of its Saskatchewan oil assets boosts its natural gas production percentage to 72 per cent versus 28 per cent oil. It is a low-cost and high-quality producer with one of the best managements in the business — exactly what you want in this type of environment. We are positive on the long-term outlook for natural gas (much more so than oil), so we view the company very favourably here. ARC has been hurt by a combination of low oil prices and negative feelings towards B.C. producers under the new government uncertainties. We believe energy prices are nearer their lows than their highs and that common sense will ultimately prevail with reference to oil and gas production and export in B.C. We would use the current weakness to buy shares. ARC currently yields 3.5 per cent.

GENERAL ELECTRIC (GE.N): Owned by clients, self and family. We have owned this stock for quite a number of years and continue to buy it at current prices for new clients.
Talk about an out-of-favour stock. General Electric has severely underperformed the S&P 500 so far this year. Despite its ongoing transformation from a conglomerate dominated by its financial services division to a more balanced company, the ongoing weakness in the energy and power divisions continue to cause a drag on earnings. This has caused investors to bail on the stock despite the fact that the CEO, Jeff Immelt, is retiring. The latest quarter, reported last week, was a meaningless one as it reflects the “old” GE and the new CEO, John Flannery, has yet to state his vision. You can be sure he will low-ball his outlook so that he can easily beat street expectations. This could be the catalyst the stock is looking for. We like out-of-favour stocks that have the potential to be big future winners. We believe GE fits that bill. Shareholders are being rewarded with a current yield of 3.7 per cent while they wait and GE’s dividend is both safe and it should grow on a regular basis.