Brett Girard's Top Picks: May 27, 2019

Brett Girard, chief financial officer and portfolio manager at Liberty International Investment Management
Focus: 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)

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  fuve 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. 

WEBSITE: www.libertyiim.com