Norman Levine, managing director at Portfolio Management Corp
FOCUS: North American large caps
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MARKET OUTLOOK

We’ve been expecting and hoping for a correction for some time and we had a couple of very brief ones in the past few months, but nothing to write home about. We believe that markets, especially in the U.S., are expensive and in need of a pause, if not a good 5 to 10 per cent correction to bring valuations to more reasonable levels. But we also believe that the U.S. economy is doing fine and should continue to do so for at least the next year or so.

In addition, the U.S. economy’s strength has been pulling the rest of the world along with it. Because of that, we remain committed to equities, but strongly favour ones whose valuations still seem reasonable to us and remain on the outlook for bargains to add to our portfolio.

TOP PICKS

CARA OPERATIONS (CARA.TO) 
Cara is Canada’s oldest and largest full-service restaurant company operating some of the most recognized names in the country. Over 88 per cent are franchised and over 60 per cent are in Ontario. We like the continued move by Cara to an asset-light business model. It currently has about 8 per cent of the highly fragmented full-service restaurant industry and clearly has room to grow that share through both organic growth and acquisition in both full-service and quick-service (such as the recent Pickle Barrel acquisition). Cara stock has performed poorly for much of 2017 until recently, as investors have punished it for its relatively large exposure to Alberta and for negative same-store-sales.  There are also worries about the coming increases in minimum wage in Ontario and Alberta.

We think Cara will help out its franchisees to some extent, and we believe the stock more than reflects those concerns. We feel that negativity towards the stock has been overdone, especially as the company’s sales have begun to rebound, as management reported recently. Cara currently sports a dividend yield of 1.6 per cent. Bought on April 28, 2016 at $32.75 and bought again on October 31, 2017 at $25.12. We continue to buy for new clients.

OPEN TEXT (OTEX.TO) 
Open Text is a consolidator and provider of enterprise software solutions. Their software helps large businesses organize their information, both storing and retrieving. For example, Open Text’s software can assist in organizing customer communication for salespeople. For an industrial company, Open Text’s software can help organize workflow – how work and information move from one person to the next. It is an industry consolidator and grows largely through acquisition. The stock weakness, due to concerns over its ability to properly digest its recent acquisitions, provides investors with a very attractive entry point. The stock currently yields 1.6 per cent. Bought originally at $26.18 and bought again on October 13 at $42.12. We continue to buy for new clients.

SANOFI (SNY.N)
Sanofi (formerly Sanofi-Aventis) is a French-based multinational health care company focused on medicine for rare diseases, multiple sclerosis, immunology and oncology, and also has a solid consumer health division just acquired from Boehringer Ingelheim early this year (synergies). The company is reasonably valued due to increased competition for its diabetes drug Lantus. Management is disciplined, having been outbid on a couple of potential acquisitions. The balance sheet is strong and the dividend yield of 3.7 per cent is attractive. As time passes, drugs in its own pipeline and through its partnership with Regeneron will reach the commercialization stage. The risks, as always in the pharmaceutical business, are patent challenges and failures with drugs that are in development or otherwise. Bought at US$41.00 on July 7, 2016.

PAST PICKS: DECEMBER 28, 2016

ARC RESOURCES (ARX.TO)

• Then: $23.11
• Now: $15.72
• Return: -31.97%
• Total return: -30.04%

TEVA PHARMACEUTICALS (TEVA.N)
Bought on December 19, 2016 at US$36.74. Sold less than two months later on February 7, 2017 at US$32.41, taking a hit of 10 per cent.

• Then: $35.93
• Now: $13.68
• Return: -61.91%
• Total return: -60.88%

PFIZER (PFE.N)

• Then: $32.35
• Now: $35.43
• Return: 9.53%
• Total return: 13.82%

TOTAL RETURN AVERAGE: -25.70%

TWITTER: @levinepmc
WEBSITE: www.portfoliomanagement.ca