Jan 25, 2019

Barry Schwartz's Top Picks: Jan. 25, 2019

BNN Bloomberg

Barry Schwartz , BNN Bloomberg

Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management
Focus: North American large caps

MARKET OUTLOOK

The biggest risk to your portfolio isn’t a full-blown trade war with China or whether or not a recession will happen this year or the next. The biggest risk is short-term thinking. No one can predict when a market or stock will turn down and no one can predict when the next recession will start. Instead of worrying about what could go wrong in the short-term, an investor should focus on what could go right over the long term. It is best to ignore the current day-to-day volatility and news flow. What you should be doing is ensuring that you have the right asset allocation to meet your long-term goals and objectives. The worst thing you can do is make changes to your portfolio because of a gut instinct or an emotional reaction. There will never be a perfect time to invest. However, if you don't need your excess capital in the short-term, investing now is as a good as any time.

Valuations on the market are the cheapest they have been since 2015. It appears that interest rates have stopped going up. Investing is all about comparing alternatives. In our opinion, good quality companies trading at reasonable valuations that have a history of profitability offer the best potential upside over the medium term.

We don’t believe that the neither the economic outlook nor the corporate profit growth for 2019 is as good as 2018. That said, stocks have already taken a major drop and are priced attractively. Don’t overpay and hold tight.

TOP PICKS

DELTA AIRLINES (DAL.N)

We remain bullish on the airline industry overall. Decades of consolidation have reduced the number of major airlines to four, with each airline dominating their respective hubs. Airports in the U.S. are largely out of capacity, giving airlines pricing power. Pricing increases have come through fees for additional baggage as well as segmentation of customers such as premium economy. Airlines have also raised prices in-line with oil prices, but are unlikely to reduce them now that oil is lower. We like Delta over its competitors because of its strong management and smart capital allocation.

CN RAIL (CNR.TO)

CN Rail is the best run railroad in North America. It has consistently reduced its operating ratio (a lower operating ratio is a sign of efficiency). No one is ever going to build a new railroad in North America. CN is a high return on capital businesses and is run by a shareholder-friendly management teams. CN has plenty of growth projects such as port expansions that should drive growth over the next few years, and it should also benefit from the crude-by-rail opportunity if pipeline supply issues continue.

MAGNA INTERNATIONAL (MG.TO)

Magna is one of the largest automotive suppliers in the world and it has done a terrific job repositioning its portfolio from a “legacy supplier” to benefit from the growth areas within automotive such as autonomous vehicle technology, sign detection and vision cruise control, and automatic braking. We believe these growth businesses can make up over 25 per cent of Magna’s revenues over the next seven to eight years. Magna has a clean balance sheet and has reduced its share count 11 per cent over the last two years. Given its recent strong guidance, we believe Magna will continue to reward shareholders with buybacks and dividend increases.