Paul Harris, partner and portfolio manager at Avenue Investment Management
Focus: North American and global equities

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MARKET OUTLOOK

The global economy continues to grow; it's the first time in 10 years we're seeing a coordinated growth around the world. We're also seeing strong earnings and topline revenue growth rather than the deterioration in margins that some have been expecting.

After a volatile last few months, valuations are more reasonable at 16.5 times on the S&P. Although we see coordinated global growth, we see growth at a 2 to 2.5 per cent level with low inflation. The yield curve continues to flatten, which continues to indicate moderating long-term growth and inflation. This economic environment bodes well for stocks longer term. In the short term, we may see great volatility as inflation or yields move higher. We would see this as a buying opportunity. 

At the margin, we see:

• Higher rates as central banks unwind quantitative easing (QE).
• Short-term higher inflation, but not extreme numbers.
• Strong earnings growth, which can sustain valuations and see targets increase for the S&P and TSX.
• Greater volatility as the market adjust to the new reality of higher rates and quantitative tightening (QT). I think the dual effect of higher rates and QT has already made the Fed quite restrictive — more that the Fed funds rate indicates.
• I would look at big pullbacks as buying opportunities.

TOP PICKS

BANK OF AMERICA (BAC.N)

Bank of America is one of the largest banks in the U.S., holding 10 per cent of all deposit in the country. The bank continues to reduce cost through reduction in headcount and technology. The company continues to improve its capital base with Tier 1 ratio at 13.60 per cent. The stock trades at 1.28 times book value and 12.75 times 2018 earnings. The company is buying back stock and will be increasing its dividend over the next several years from its present yield of 1.88 per cent. We think the intrinsic value is $50.

DOLLAR TREE (DLTR.O)

Dollar Tree operates discount variety stores offering merchandise at a fixed price. The company has 14,334 stores in 48 states and in Canada. The stock trades at 16.73 times 2019 earnings, 10.3 EV/ EBITDA, and a free cash flow yield of 5.7 per cent.

FIRSTSERVICE CORP (FSV.TO)

FirstService Corp was recently spun out of Colliers International. The company focuses on residential property management and services. It has room to grow market share in the U.S. in what remains a very fragmented business. Trades at 28 times next year’s earnings and yields 1.0 per cent.

PAST PICKS: MARCH 8, 2017

BAYERISCHE MOTOREN WERKE AG (BMW.ETR)

• Then: €86.65
• Now: €90.39
• Return: 4.31%
• Total return: 8.50%

BLACKSTONE GROUP (BX.N)

• Then: $29.10
• Now: $31.51
• Return: 8.28%
• Total return: 17.54%

AUTOCANADA (ACQ.TO)

• Then: $24.01
• Now: $21.74
• Return: -9.45%
• Total return: -7.71%

Total return average: 6.11%

WEBSITE: avenueinvestment.com