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

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BNN Bloomburg Global Equities

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 – January 17th 2019 – Market Outlook & Top Picks

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market call tonight screenshot

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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Liberty IIM, Top Pick of Bloomberg

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

BNN Market Call Tonight – November 2, 2018 – Top Picks

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market call tonight screenshot

TRANSCANADA (TRP.TO) 
Last bought at $50.99.

TransCanada mostly operates natural gas pipelines in North America and Mexico. It plans to add $10 billion of new projects in 2019 and another $26 billion by 2020. If their Keystone XL project gets approved, the shares should recover from the discount they currently trade. The firm expects dividend growth to continue in the 8 to 10 per cent range for the foreseeable future. Its current dividend yield is an attractive 5.42 per cent.

UNILEVER NV (UN.N)
Last bought at US$53.88.

Unilever is a global consumer products company with three main divisions: food and beverages, cleaning agents and personal care. Global market volumes have remained robust in aggregate, up around 1 per cent. There are some significant bright spots:  Market growth in India and China remains strong, while e-commerce continues to be the key growth driver. In aggregate, underlying sales grew by 3.8 per cent in the third quarter, with volumes up by 2.4 per cent. In the emerging markets, growth accelerated to 5.6 per cent and we’ve maintained good volume growth at 3.4 per cent, which is very encouraging. Its current yield is 3.15 per cent and the dividend has historically grown by 10 per cent annually.

BECTON DICKINSON (BDX.N)
Last bought at US$234.16.

Becton Dickinson is a medical technology company that makes and sells medical devices, instrument systems and reagents. Its 2017 acquisition of C.R. Bard combined two strong free cash flow generating companies and added urology products to the Becton sales line. The company also makes disposable products, such as syringes and vials for blood tests. The stock yields 1.28 per cent, but the dividend has consistently grown 10 per cent annually.

Disclosure     |     Personal     |     Family     |     Portfolio

TRP                                 Y                            Y                          Y

UN                                  Y                            Y                          Y

BDX                                 Y                            Y                          Y

BNN Market Call Tonight – November 2, 2018 – Market Outlook

Articles,

MARKET OUTLOOK

I’m not convinced that we’re out of the woods yet. These markets still appear to be expensive. Here’s why:

  1. Midterm elections are around the corner. If the Democrats win, U.S. politics will be deadlocked for another two years.
  2. By next spring, earnings growth won’t have the benefit of tax cuts. From what I’ve seen so far, earnings growth for most U.S. companies is at 0 to 10 per cent when not accounting for tax cuts: That’s average at best and not as stunning as many analysts tout.
  3. Emerging market issues have reduced growth for U.S. multinational companies. This is especially those in the technology sector. The same thing occurred in 1997 during the Asian contagion which preceded the bursting of the tech bubble in 2000.
  4. The Federal Reserve should continue on its rate hike policy through December. Rising short-term rates pressure companies as they operate by borrowing in the short-term markets. This slows down their capacity to hire, innovate and acquire.
  5. Wages are quietly rising. The news today was that salaries rose just over 3 per cent. Rising wages is something else corporations have to deal with on the cost side of their businesses.

So what’s an investor to do?

  1. Stop trading and start investing. Share prices are only important when buying and selling. This is similar to your home: The only time its price is relevant is when you buy it or sell it. Since two-thirds of all long-term performance come from rising dividends and the re-investment of those dividends, investors should focus more on the rate of dividend increase, not the stock price or the current yield. Trading actively just pays for your broker’s retirement, not yours.
  2. Hold some cash and wait for better opportunities. In the past decade, it’s been a successful strategy to buy on the dips. But those investors haven’t seen markets like 2008, when buying on the dips could have bankrupted you because the market kept trending lower between December 2007 and March 2009. The cash-on-hand is to buy after a big correction (20 per cent or more), when valuations get cheap. While the market dropped significantly in October, it still hasn’t made it back to where it was at the end of September.
  3. Think about portfolio structure and have a plan in place. Now is the time to have a diversified portfolio to avoid correlation risk (too many names in the same sector) and concentration risk (too much ownership of one stock).
  4. Be patient and unemotional. Emotional investors sold at the bottom of the market in 2008 and never returned. They missed the best 10-year bull market in our lifetime. Be more practical instead, like Warren Buffett. Be an investor in a business, not a speculator, and let the dividends grow.

BNN Market Call Tonight – October 12, 2018 – Past Picks

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Market Call Past picks - Bloomberg

(from David’s appearance on Market Call on August 21, 2017)

COLOPLAST A/S (COLOB CPH)

  • Then: DKK 509.50
  • Now: DKK 612.60
  • Return: 20%
  • Total return: 24%

STRYKER CORP (SYK.N)

  • Then: $145.13
  • Now: $171.04
  • Return: 18%
  • Total return: 20%

OPEN TEXT (OTEX.TO)

  • Then: $40.29
  • Now: $45.34
  • Return: 13%
  • Total return: 15%

Total return average: 20%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
COLOB                  Y           Y                                   Y
SYK                  Y           Y                                   Y
OTEX                  Y         Y                                   Y

BNN Market Call Tonight – October 12, 2018 – Market Outlook

Articles,

MARKET OUTLOOK

Given the market volatility of the past few weeks, it’s important for investors not to lose their heads. Here are some guidelines for getting through crucial market moments:

  1. We’re just entering earnings season. This should reveal if companies’ earnings are slowing because of tariffs and higher input prices. No need to do anything until we see the impact of earnings on stock prices.
  2. U.S. midterm elections are coming up. If the Democrats win the House and/or the Senate, the market could sell off violently as Washington would return to partisan politics and create a deadlock on any future legislation being passed. Again, no need to do anything until then.
  3. From a technical standpoint, the markets still aren’t oversold yet so we don’t really see any screaming opportunities.
  4. In our estimation, the market top on the S&P 500 Index would be 3,700, which would be similar in valuation to the 1929 and 2000 peaks. Conversely, we’d only be interested in adding to our positions with any significance if the S&P 500 fell to 2,200 (20 per cent lower than today) where valuations make more sense. Remember, Wall Street pushes “adjusted earnings,” which are artificial as they don’t include interest on debt, taxes and depreciation.
  5. Holding cash makes more sense than ever. The maximum needed is 20 per cent. There’s no need to go over that amount because you’ll then have to find the market bottom (which nobody has ever been able to do).
  6. Avoid correlation risk in your portfolios. Owning similar stocks would have sent your portfolio down further than most, especially if you’re heavily tech-weighted.
  7. Avoid concentration risk. We hold 30 stocks in our portfolios with an average weight of 3 per cent. If one of them becomes a 6 per cent holding, we automatically sell half. This rebalancing helps protect the downside.
  8. You haven’t lost any money unless you sell.
  9. Time and compounding is how you make money. Two-thirds of all stock market performance in history has come from rising dividends and the re-investment of those dividends. If you want to retire wealthy, you have to let the dividends grow.
  10. If you wish to buy stocks in this market, we suggest you buy only half positions to start and sit back and watch what happens next.

In the end, there’s no reason to try to be a hero in these heady markets. Instead, discipline will carry the day.

BNN Market Call Tonight – March 28, 2018 – Market Outlook

Articles,

MARKET OUTLOOK

We expect increased volatility across all asset classes – stocks, bonds, commodities and real estate — meaning investors have to be patient and diligent to find buying opportunities. Stock valuations still appear to be stretched. The market could easily go sideways for the next two years until earnings catch up to current prices. Or, in the interim, the stock market could fall 20 per cent  to return to proper equilibrium.

For investors, it’s important to:

  • Hold cash to prepare for market corrections or to take advantage of buying opportunities. We currently hold 20 per cent cash times the client’s equity weighting. If the portfolio is 100 per cent equities, they’ll hold 20 per cent cash. If the asset mix is 50 per cent stocks and 50 per cent fixed income, they’ll hold 10 per cent cash (50 per cent multiplied by 20 per cent).
  • Stop reaching for yield. A stock’s current yield isn’t as important as the dividend growth rate. The average dividend payer on the TSX Index increased its dividends by 9 per cent this year. For the S&P 500 Index, it was 11 per cent. Dividend growth is necessary to offset inflation. Buying a stock with a high yield but no dividend growth means that inflation eats away at an investor’s spending power and the value of the investment deteriorates over time. This is especially bad for retirees.
  • Take advantage of opportunities. If a stock drops 20 per cent more than the overall market performance and there’s nothing wrong with the business model, this often presents buying opportunities.