Barry Schwartz, chief investment officer at Baskin Wealth Management

Focus: North American large caps
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MARKET OUTLOOK
This has been a tough year for Canadian investors. Those that have diversified away from the underperforming TSX have been stung by the recent sharp rise in the Canadian dollar. As well, those finding solace in bonds and bond-like substitutes run the risk of being smacked around by rising interest rates.

We are positioning our portfolios to take advantage of a pick-up in global growth. We have reduced our bond duration significantly, increased our fixed income weighting to securities that benefit from rising rates and are at our maximum exposure to equities across all client portfolios.

The quick rise in the Canadian dollar has hurt our foreign holdings in the short term, but we are confident that the growth in the underlying stock prices will eventually trump the loonie’s ascent. We expect strong earnings growth this quarter, and that should start to make pricey stocks look a little more reasonable. Canada’s economy is performing well despite continued weak energy markets and worries about a slowdown in home prices. The U.S. economy should show a rebound in Q2, although a slowdown in auto sales and home construction bears watching. U.S. multinationals could see a lift due to rising foreign currency prices against the U.S. dollar.

TOP PICKS

DELTA AIR LINES (DAL.N)
NTM P/E: 9.4x | EV/EBITDA: 5.2x | Dividend yield: 2.1 per cent

We think the U.S. airline industry has fundamentally transformed itself through years of consolidation and losses. There are currently just four major network airlines, and they have deeply entrenched positions in major hubs. We chose Delta over the others due to its smart capital allocation and good labour relations, which leads to it being the only major airline with non-unionized employees.

WASTE CONNECTIONS (WCN.TO)
NTM P/E: 28x | EV/EBITDA: 13.7x | Dividend yield: 0.79 per cent

Waste Connections is a consolidator of solid waste services (which remains a very fragmented industry). Waste Connections aims to avoid large urban markets that end up being won by the lowest bidder, and instead aims to focus on rural and secondary markets. This strategy leads Waste Connections to have industry-leading margins. We expect Waste Connections to continue to generate a substantial amount of free cash flow and continue to make acquisitions.

KAR AUCTION SERVICES (KAR.N)
NTM P/E: 17x | EV/EBITDA: 8.9x | Dividend yield: 3.2 per cent

KAR is the second-largest provider of used car and salvage auction vehicles. Car auctions are a profitable business with high margins and low capex requirements. As more and more cars come off-lease, KAR should continue to benefit as the cars flow through their auctions. The salvage auction side has also benefited from a rise in distracted driving. We think this is a good deal at an eight per cent free cash flow yield.

We are adding all three at current prices.
 

PAST PICKS: JUNE 24, 2016

SAPUTO (SAP.TO)

• Then: $37.72
• Now: $40.42
• Return: +7.15%
• TR: +8.60%

PRICELINE GROUP (PCLN.O)

• Then: $1,232.14
• Now: $1,976.24
• Return: +60.39%
• TR: +60.39%

ORACLE (ORCL.N)

• Then: $39.23
• Now: $50.45
• Return: +28.60%
• TR: +31.13%

TOTAL RETURN AVERAGE: +33.37%