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All posts by Brett Girard

BNN Bloomberg Market Call Tonight – August 2 2019 – Top Picks

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MARKET OUTLOOK

While some market analysts make the statement that the majority of this quarter’s earnings are positive, we disagree. We believe the S&P 500 Index is not trading at 19.21 times earnings but more like 21.79 times earnings, a 14-per-cent difference or overstatement.

We believe companies are using smoke and mirrors to fudge their earnings in three ways:

  1. They’ve talked down expectations so they don’t have as much ground to make up.
  2. They’re buying back shares in record amounts to ensure they show earnings “growth.” For example, Bank of America earnings were up 8 per cent in the last quarter, but if not for the share buybacks, there would have been little to no profit growth.
  3. Companies have reduced their capital expenditures, which has reduced their costs and pumped up earnings. Unfortunately, by not investing in capex, these firms are sacrificing the future for the present.

Our S&P Index ranges remain 3,700 on the high side and 2,200 on the downside. In the event of a “melt up” rally of 20 per cent, market valuations would be similar to the 1929 and 2000 peaks. If the S&P drops from 3,700 to 2,200, the difference would be 40 per cent on the downside. This is not a good risk/reward ratio to have. If you take $1 and go up 20 per cent and then drop 40 per cent, you’ll be left with 72 cents, not the original $1. And similar to 2008, it may take four to five years to get back to break-even. That could put retirements in jeopardy or those preparing to retire as nest eggs would be much lower and why we believe it’s important to hold some cash in the portfolio, be diversified globally and avoid correlation risk and concentration risk.

 

CHUBB (CB.N 0.57%)
Last purchased on July 23, 2019 at $145.98.

Chubb is a global property and casualty insurance company with subsidiaries in 55 nations. The best metrics to study for the insurance industry is book value growth and combined ratios. Year-to-date, net tangible book value is up 12 per cent, while the combined ratio is 89 per cent (89 cents of costs versus $1 of premiums written). Their entire investment portfolio of US$107 billion is made up of investment-grade bonds and cash, so if interest rates continue to fall, the value of the investment portfolio should grow.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO 0.53%)
Last purchased on July 23, 2019 at $63.36.

Brookfield invests in real estate, power-generation assets and infrastructure holdings. An investment in Brookfield is to take advantage of long-duration assets that should provide sustainable returns while management fee income from its private equity pools enhances overall total returns. It’s also a quasi-hedge. If economic growth collapses, Brookfield, compared to other publicly-listed corporations, should be sheltered from an earnings collapse.

TREASURY INFLATION-PROTECTED BONDS (TII 2.125% due Feb. 15, 2040)
Last purchased on July 24th, 2019 at $128.95

The Treasury inflation-protected bonds are another way to hedge against falling interest rates. Long-dated bonds have the greatest price sensitivity and rise the most in price when interest rates drop. An investor receives the 2.125 per cent coupon every year plus the inflation rate (currently 1.65 per cent) for a total coupon of 3.775 per cent. Add in the price return of 10.3 per cent and the total return year-to-date is 14.08 per cent in U.S. dollars. If the U.S. government continues to raise budgets and increase its deficit spending while wages continue to move higher, inflation could rise.

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CB           Y           Y           Y
BAMa           Y           Y           Y
TII 2.125%           Y           Y           Y

 

BNN Bloomberg Market Call Tonight – July 29 2019 – Past Picks

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MARKET OUTLOOK

While the VIX remains just off 2019 lows, investors must remain vigilant and focus on portfolio management. The average retirement account holds three asset classes: equities, fixed income and cash. On the equity side, we recommend a portfolio of 30 stocks diversified by geography, industry and size of company. For fixed income, a laddered corporate bond portfolio and inflation linked bonds are critical. Lastly, we recommend holding cash in varying percentages to dampen the volatility of the market. An investor’s asset class allocations and the constituents within each asset class should be reflective of their time horizon and risk profile.

Taking this approach means investors can have comfort knowing their portfolio does not need to be adjusted for every news headline. For example, the bond market is pricing in a 0.25 or 0.5 per cent cut in interest rates by the Federal Reserve on Wednesday. Whether the cut happens, the magnitude of the cut is larger or smaller than expected and/or the language around the cut is dovish or hawkish, if an investor’s portfolio reflects their time horizon and risk profile, it’s unlikely any changes are required.

It would behoove investors to focus on the bigger picture. If your time horizon is longer than a decade, be in equities and be patient. The S&P 500 hit new highs 219 times this decade and can continue doing so over the long term.

PAST PICKS

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

  • Then: $63.56
  • Now: $65.07
  • Return: 2%
  • Total return: 3%

HEICO CORP (HEI.N)

  • Then: $104.11
  • Now: $137.63
  • Return: 32%
  • Total return: 32%

HDFC BANK (HDB.N)

  • Then: $122.72
  • Now: $115
  • Return: -6%
  • Total return: -6%

Return average: 10%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BAMa           Y           Y           Y
HEI           Y           Y           Y
HDB           Y           Y           Y

 

BNN Market Call Tonight – May 27th, 2019 – Market Outlook & Top Picks

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MARKET OUTLOOK

Is the market expensive? If you believe the numbers, the S&P 500 is trading at a forward earnings multiple of 17.2 versus a historical average of 15. When you adjust for the fact that share buybacks are averaging about 2 per cent of float, the S&P is overvalued by about 17 per cent.

So, what should you do? That depends entirely on your time horizon and risk profile. If you have a short-term liability (buying a car or house), a substantial drawdown of your portfolio is required: play it safe and be in cash or highly-liquid short-term fixed income investments. But if you expect to own your portfolio for five years or longer, you can’t afford to be out of the market. Interest rates are expected to stay low, which is why the stock market has rallied for the better part of 10 years.

How do you proceed in the latter scenario? The prime focus should be on asset allocation. Equity selection comes down to companies that can consistently grow free cash flow and reward their shareholders with a growing dividend. For any new Liberty clients, we’re purchasing only half positions to start and then wait for opportunities. This provides upside participation, but also downside protection.

For fixed income, corporate bonds should be laddered over a 10- to 15-year time horizon to benefit from rising or falling interest. Finally, cash should be a strategic allocation as its correlation with the stock market is almost zero. Our clients currently hold 20 per cent times their equity allocation. If their asset mix is 60 per cent equities, they have 48 per cent invested in stocks and hold 12 per cent cash.

TOP PICKS

BROOKFIELD ASSET MANAGEMENT (BAMa.TO 0.20%)

Following the acquisition of Oaktree Capital, this company is now the second-largest global asset manager by assets under management (AUM) after Blackstone. This is an opportunity to participate alongside some of the investment field’s brightest minds with access to asset classes like infrastructure, renewables, private equity and real estate that are out of reach for the average retail investor. They continue to exhibit long-term strategic thinking with the recent acquisition of the battery division of Johnson Controls (renamed Clarios) which supplies roughly one-third of the world’s car batteries. Layer on the counter-cyclicality of distressed debt powerhouse Oaktree Capital and you have a great long-term hold.

HEICO CORP (HEI.N)

Heico is a family-operated serial acquirer in aerospace and defense. Since the current father-and-sons management team took over in the early 1990s and acquired over 70 companies, compound annual sales and net income have grown at 16 and 19 per cent respectively. Their Flight Support Group (which sells certified airline replacement parts) should do well as many shelved planes have been brought back into the fleet as a result of the Boeing Max 8 grounding. Meantime, their Electronic Technologies Group continues to develop and purchase highly specialized offerings catering to the defence, satellite and space sectors.

HDFC BANK (HDB.N)

Indian Prime Minister Narendra Modi recently won the national election and will be in power for another five years. India operates under a democratic model so change may take longer relative to China, but should occur nonetheless. The country’s 6-per-cent GDP growth rate is double the U.S.’s. For HDFC, revenue, deposits and loans continue to grow 15 to 20 per cent. Layer in a steeper yield curve and the secular trend of a population becoming more urbanized and wealthy and HDFC becomes an attractive, long-term opportunity.

 

BNN Market Call Tonight – March 21 2019 – Market Outlook & Top Picks

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Liberty IIM, Top Pick of Bloomberg

MARKET OUTLOOK

Corporations currently have a problem: They have massive amounts of debt to repay after acquisitions, limiting the amount of money they can allocate to share buybacks and dividend increases. These buybacks have been the reason the stock market has risen as much as it has. According to data from Goldman Sachs, net purchases from companies totaled $1.6 trillion during the past three years while investors from pensions to mutual funds to individuals were sellers.

At $17.6 billion, corporate buybacks so far in 2019 are 18 times as much as the total buying from hedge funds, the only other client group that’s bullish on stocks. Charlie McElligott at Nomura cautioned investors to watch out for a market decline after the S&P 500’s 20 per cent rally from its December low. The next month is “the window for the U.S. equities pullback as supply/demand would shift,” McElligott wrote in a note. Other catalysts include quarter-end selling due to pension fund rebalancing and a pickup in Federal Reserve balance sheet runoff in the final two weeks of this month, he said.

Finally, of the companies listed in the S&P, the average dividend increase in 2018 was 11 per cent. This year, it’s been averaging 7 per cent, the historical norm but significantly lower than a year ago when companies began to pay lower corporate taxes.

For investors, it’s important to pay attention to portfolio structure through proper diversification by avoiding correlation risk in equity holdings, concentration risk of any one stock and holding enough cash to take advantage of any market corrections that may come our way.

TOP PICKS

CANTEL MEDICAL CORP (CMD.N)
Last purchased on March 20, 2019 at $67.02.

Cantel is a healthcare company that provides infection prevention (water sterilization for hospitals and dental clinics), control products and diagnostic and therapeutic medical equipment. Its diverse offerings include medical device reprocessing systems and disinfectants for dialyzers and endoscopes, water purification equipment, masks and bibs used in dental offices and therapeutic filtration systems.

The stock reached a high of $130.92, but currently trades at half that value thanks to a slowdown in the dental and life sciences businesses. However, organic revenue growth was 5.3 per cent last year and free cash flow is expected to double, which should provide a pickup in profitability. The company also installed a new CEO to help turn around its weaker businesses. Dividend growth is in the mid-teens and the payout ratio is just 8 per cent, so lots of room to grow the dividend.

ENGHOUSE SYSTEMS (ENGH.TO 1.01%)
Last purchased on March 21, 2019 at $31.99.

Develops software products for automated mapping, call centres, transportation solutions, facilities management and geographic information systems. It’s a Canadian company with lots of international exposure. It currently trades near its 52-week low because revenues in the last quarter rose only 1 per cent. That’s because they didn’t make any acquisitions, which to us is a positive sign that management won’t overpay for future deals. The dividend has steadily grown in the mid-teens and the payout ratio is only 8.5 percent.

EXPONENT (EXPO.O 0.35%)
Last purchased on March 20, 2019 at $57.27.

Exponent operates as a science and engineering consulting firm. The company performs scientific research, analysis and evaluations to solve complicated issues facing a range of industries and governments. A risky business is a potential customer for Exponent.

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CMD           Y           Y           Y
ENGH           Y           Y           Y
EXPO           Y           Y           Y

BNN Market Call Tonight – February 15 2019 – Market Outlook & Top Picks

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MARKET OUTLOOK:

It appears we’re in full “risk-on” mode as investors have forgotten the reasons behind the massive sell-off in the fourth quarter of 2018 and the fact that global economic growth is slowing, as are corporate earnings. The race to S&P 3,700 is well underway – only 1,000 more points to go and we’ll be back at historical tops last seen in 2000 and 1929.

According to Andrew Slimmon, managing director at Morgan Stanley Investment Management, “The market is pricing in a down Q1 (a drop in corporate earnings) but they’re pricing in a positive Q2 and Q3,” said. “The risk is that Q2 slips to zero growth and now you’re talking about two consecutive quarter of negative earnings growth, which is technically an earnings recession. The reason why the market has not focused on this yet is there was such an overwhelmingly high level of bearishness at the beginning of the year,” Slimmon said. We couldn’t agree more. For all equity portfolios, we’re 80 per cent invested and still holding 20% in cash until we see some form of market capitulation.

TOP PICKS:

CN RAIL (CNR CN) $111.41 operates a network of track in Canada and the United States, transporting forest products, grain, coal, sulfur, fertilizers intermodal and automotive products. It operates a network of about 20,000 route miles of track connecting the Atlantic and Pacific oceans and the Gulf of Mexico. We have owned the stock since 1997 and have captured a dividend that has grown an average of 16%. With the North American economy crippled by logistics issues (a dearth of transport trucks because of a lack of drivers or pipeline issues in the oil and gas industry), more freight is being shipped by rail. The increase in revenues essentially falls directly to net income which should help buoy the stock price. Last purchase was on February 13, 2019 at $108.31 CAD.

IPSEN SA (IPN FP) $124.45 Euros is a pharmaceutical firm whose drugs target oncology, endocrinology and neuromuscular disorders. The oncology business now represents over two-thirds of sales. Somatuline (for advanced carcinoids) leads the way, with Cabometyx (renal cell cancer) and Onivyde (metastatic pancreatic cancer) picking up more revenues. The company has $1 billion euros in cash-on-hand, its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) is only 2 times, leaving it with plenty of room to make acquisitions. R&D expense is average, around 13% of revenues. Last purchase was on February 13, 2019 at 109.95 euros.

THERMO FISHER SCIENTIFIC (TMO US) $249.91 offers analytical instruments, laboratory equipment, software, services, consumables, reagents, chemicals and supplies to the pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions and government agencies. It is a serial acquirer as its recent purchase of Patheon was made to offer its clients beginning (research) to end (manufacturing) opportunities. Of the top 15 innovations in 2018 that were recognized by the readers of Analytical Scientist Magazine, five of them came from TMO. Their strong free cash flows allowed them to reduce debt by $2 billion and reduce leverage from 4 times to 3 times. The dividend was also raised by 13%. Last purchase was February 12, 2019 at $247.32 USD.

BNN Market Call Tonight – January 17th 2019 – Market Outlook & Top Picks

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MARKET OUTLOOK

In the fourth quarter of 2018, the market gave a wakeup call for investors. Stocks were overvalued and at an earnings peak, leaving investors to lick their wounds when their stocks got pounded. The lesson is that it didn’t need to happen if they took the appropriate steps to diversify their portfolios and hold some cash. Our all-equity clients, who were with us for the entire year, made 4 to 8 per cent depending on their circumstances.

Meantime, because we saw this as a correction and not investor capitulation, we believe that nothing has changed. For the market to continue higher, earnings growth is going to have to be as strong in 2019 as last year. Unfortunately, we don’t see that happening. When second-quarter earnings are announced by July, the benefit of U.S. tax cuts will disappear and company growth will be dependent on global GDP growth, which is already in decline. As a result, an earnings slowdown could keep the markets under wrap for 2019. More is explained in our upcoming newsletter, available on our website.

We continue to hold 20 per cent cash times the equity weight in portfolios and have no desire to sell our securities, as the average dividend growth rate is around 14 per cent.

TOP PICKS

DANAHER (DHR.N 1.27%)
Last purchase was Jan. 7, 2019 at $101.46.

Danaher is a conglomerate of companies in the medical sciences, water management, dental and industrial technologies segments. Its businesses offer solid growth and the company has a penchant for finding reasonable acquisitions to grow their business both organically and through M&A activity. Expected revenue growth is 5 per cent organic to 2020, the dividend has been rising between 10 and 15 per cent a year and its debt-to-cash flow is two times, leaving it with plenty of room to make acquisitions. It currently trades around 15 times 2021 expected earnings.

NV5 GLOBAL (NVEE.O)
Last purchase was Jan. 7, 2019 at $64.36.

It provides professional and technical engineering and consulting services. The company offers planning, design, consulting, inspection, field supervision and management oversight, servicing the construction, real estate and environmental industries. The stock dropped from a $96.70 high in November and currently trades at an expected 12 times earnings for 2021. It doesn’t pay a dividend and is part of our U.S.-only and small-cap portfolios.

TELEPERFORMANCE SA (TLPFY.PK)
Last purchase was Jan. 8 at €143.20.

This company operates call centres, conducts programs to attract new customers, offers customer services and technical support services, collects debts, offers market research services, conducts telemarketing and develops CRM software. We like Teleperformance as it has embraced the future of call centres using artificial intelligence. This improves services and reduces costs as companies worldwide (like the banks and telecoms) work to cut expenses. The company is scaling up, allowing it to generate better free cash flows. This has helped support a significant boost to its dividend payout (1.85 euros in 2018, up from 1.30 euros in 2017). It currently trades at 15 times 2021 earnings.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
DHR Y Y Y
NVEE Y Y Y
TLPFY Y Y Y

 

BNN Market Call Tonight – December 7, 2018 – Top Picks

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HALMA PLC (HLMA.LON)

Halma is a health and safety sensor technology group which makes products that detect hazards and protects assets at work in public and commercial buildings. Product demand is steady and, while not recession-proof, it can hold its own in difficult markets. Only 25 per cent of their sales are in the U.K. and European markets, so any drop in the British pound is beneficial to higher sales and earnings.

FIRST CASH FINANCIAL SERVICES (FCFS.O 0.89%)

First Cash Financial Services owns and operates pawn stores in the U.S., Mexico and other South American countries. When economies fall into recession, pawn shop activity picks up. If the U.S. dollar falls and the price of gold rises, First Cash Capital also benefits as they deal a lot with pawned gold jewelry. Since its first payment in 2015, the company has been raising its dividend by about 18 per cent annually.

METRO INC (MRU.TO 0.90%)

Metro is a Canadian food retailer in Quebec and Ontario that has recently purchased the assets of Jean Coutu, a pharmacy retailer. This is an inelastic consumer company that performs in both strong and weak economies. It currently trades at 14.5 times 2020 earnings as profits and dividends are expected to grow by 10 per year.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
HLMA           Y           Y           Y
FCFS           Y           Y           Y
MRU           Y           Y           Y