Bryden Teich, partner and portfolio manager at Avenue Investment Management
Focus: North American stocks

MARKET OUTLOOK

The market strength since the beginning of November has been impressive. The key driver has been the positive vaccine news announced over the last few weeks. On a shorter time horizon, the market is starting to feel stretched; however, we are also now dealing with a seasonally strong time of the year. Any shorter-term weakness that emerges will be a great opportunity to add to positions. Our expectation at Avenue is that 2021 is setting up to be a very strong year for the market and the economy and our portfolios are positioned to benefit from that view.

It appears the new Biden administration is likely to pursue policies consistent with a weaker U.S. dollar, which will further provide a backdrop conducive to strong global growth. With the Dow Jones Industrial Average breaking out to new highs as well as the Dow Transports doing the same, we have Dow Theory confirmation, which is suggestive of broad market strength going forward into 2021. On top of this, a breakout to new highs for the Russell 2000 Index points to a strong broad market. Industrial commodities like copper are also very strong, additionally more cyclical stock markets likes the South Korea KOSPI are showing strength.

When we see signs of market strength like this, the best course of action for investors to take is to let price action drive their decision-making and to not get too bearish too early. Let your long positions run. Price action is king.

TOP PICKS

Roper Technologies (ROP NYSE)

Roper Technologies is a diversified industrial technology company that designs and distributes application software (both license and SaaS) to a variety of sectors throughout the economy. Most of Roper’s businesses are leaders in their respective niche markets and benefit from high recurring revenue streams. They operate an asset-light, low capital-intensity business and they have an established track record of compounding their free cash flow into high return on invested capital businesses. This focus on high-return businesses has allowed Roper to grow their gross margins from the mid 50 per cent range to 65 per cent over the past decade.

AutoZone (AZO NYSE)

AutoZone is a leading retailer and distributor of automotive replacement parts and accessories, with more than 6,000 stores in the U.S. Each store carries an extensive line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured hard parts, maintenance items and accessories. AutoZone derives their largest segment of customers from the DIY customer. With the average age of used cars expected to approach a multi-year high over the next few years, we think the automotive parts retailers are a good investment to benefit from this trend.

Suncor (SU TSX)

Suncor is an integrated oil company with assets in the oil sands as well as refining assets. Amidst the expectation of a strong year in 2021 for global economic growth, we think Suncor offers a good opportunity at these levels.

PAST PICKS: OCT. 28, 2019

CargoJet (CJT TSX)

• Then: $95.36
• Now: $213.65
• Return: 124%
• Total return: 126%

Humana (HUM NYSE)

• Then: $289.37
• Now: $404.68
• Return: 40%
• Total return: 41%

Mullen Convertible Bonds 5.75% 2026

• Then: $102.41
• Now: $105.68
• Return: 3%
• Total return: 3%

Total return average: 57%