Bryden Teich, portfolio manager at Avenue Investment Management
FOCUS: North American equities
After a strong year of global growth in 2017 we see this trend continuing into 2018. This trend should bode well for cyclical economies like Canada. That being said, the risks of NAFTA uncertainty, as well as a slowdown in the real estate market amid tighter mortgage rules, may create a headwind into the new year. However with the strong global growth we are seeing, commodities look attractive at these levels, which would be a benefit to the Canadian stock market. The U.S. market looks like it is poised to enter a melt-up phase on the back end of strong economic growth as well as corporate tax reform, which will directly benefit earnings. Inflation still remains an enigma but with tight labour markets in both Canada and the United States, our bias would be to higher interest rates and a tougher environment for the bond market in 2018.
CVS HEALTH (CVS.N)
We like CVS because of the consistency of their free cash flow and their strong history of buybacks and dividend increases. With the proposed acquisition of Aetna they are vertically integrating themselves into a comprehensive health care benefits manager in addition to their legacy retail pharmacy business. They are also set to benefit significantly from the tax reform in the U.S. as they currently pay the highest marginal tax rate. The shares trades at 12x earnings and yield 2.5 per cent.
BLACKSTONE GROUP (BX.N)
We like Blackstone because of the significant earnings power of their underlying asset management business. They had a record fundraising year and now sit with $100B in funds to deploy and have had very strong performance in their underlying segments. They also have a significant opportunity to grow their infrastructure fund over the next several years. The shares currently trade at 11x earnings and yield 6.7 per cent.
ALIMENTATION COUCHE-TARD (ATDb.TO)
We like Couche because of their strong earnings growth after their recent acquisitions. They are well diversified outside of Canada with 85 per cent of gross profit being generated between the U.S. and Europe. There is still a large opportunity for them to continue to consolidate the gas bar/convenience store space as it remains highly fragmented south of the border. Shares trade at 17x earnings and yield 0.6 per cent.
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