Full episode: Market Call Tonight for Wednesday, October 16, 2019
Ashley Misquitta, senior portfolio manager at Empire Life
Focus: U.S. equities
From a near term perspective, we are positioned cautiously. Two key concerns remain front of mind. First, trade remains a substantial unknown. Second, global macroeconomic data continues to disappoint.
Mitigating this somewhat is that the U.S. consumer appears to be in good shape, while the Federal Reserve and central banks around the world have adopted a more supportive posture with respect to interest rates and a renewed balance sheet expansion.
All these dynamics merit a heavier focus on businesses with strong competitive advantages, conservative balance sheets and reliable cash flow production and management teams that have incentive structures well aligned with shareholders.
Looking beyond the short term however, we’re optimistic about investment opportunities in the U.S. America is an extraordinary global innovation engine and home to a growing working age population. Meanwhile, hydraulic fracking and horizontal drilling has turned the U.S. into an oil and natural gas superpower. We expect these and other dynamics will be economic drivers and continue to help make it a market with robust investment opportunities in the long term.
- We added to Apple on a pullback and later trimmed somewhat.
- We trimmed Celgene after the acquisition was announced.
Aptiv is a global auto parts company positioned to benefit from the transition to autonomous and electric cars. They’re also poised to do well in an environment where these changes happen more slowly than anticipated. Their competitive advantages are robust, positioning them well for the future. Beyond their role as a parts supplier, we believe Aptiv is in the top tier of auto and tech companies attempting to develop autonomous driving systems.
The company is solidly cash generative, has modest leverage and no meaningful debt maturities until 2021. We believe it trades at an attractive valuation relative to its long-term opportunity.
Anthem is well positioned for the changing U.S. healthcare landscape. Because it has scale not only at a national level, but also locally, it’s able to negotiate and engage effectively with all parts of the healthcare system. Anthem is a large provider of commercial insurance, a leader in Medicaid management and has a growing Medicare Advantage business, which boasts a tailwind from the large numbers of people reaching 65 years of age in the U.S.
Financially, Anthem is attractive structurally as they generate substantial free cash and require modest capital spending. The free cash flow creates optionality to return capital to shareholders or to make tuck-in acquisitions. Anthem is enjoying meaningful economic tailwinds from the organic growth in their business, inorganic growth from the acquisition of smaller Medicare Advantage players and from federal tax reform.
OCCIDENTAL PETROLEUM (OXY:UN)
Occidental Petroleum is among the largest producers of oil in the Permian Basin, with both unconventional and enhanced oil recovery operations. In addition, they have operations in the Gulf of Mexico, Colombia, the Middle East and other U.S. unconventional basins.
We believe the company is well positioned for a variety of oil price environments, with management focused on returns to shareholders. Occidental’s dividend yield is above 7 per cent and the company indicates they’ve increased it for 17 consecutive years. It’s in the process of delevering its balance sheet after a recent acquisition.
Another attractive aspect is Occidenta’s investment in carbon capture and sequestration. It’s an investor in Carbon Engineering, a B.C.-based company which employs direct air capture to capture carbon dioxide from air with typical atmospheric concentrations. Occidental has announced they have an off take agreement for the CO2 captured from the first industrial scale demonstration plant which they will use for enhanced oil recovery and sequester the CO2 deep under the ground.
We believe the company is attractively valued and the current stock price does not sufficiently capture the opportunity from balance sheet delevering, acquisition synergies or long-term opportunities for the base business or carbon sequestration.
PAST PICKS: OCT. 22, 2018
- Then: $74.28
- Now: $89.11
- Return: 20%
- Total return: 21%
- Then: $220.65
- Now: $234.37
- Return: 6%
- Total return: 8%
- Then: $80.61
- Now: $100.97
- Return: 25%
- Total return: 25%
Total return average: 18%