Bryden Teich's Top Picks: June 1, 2018

Bryden Teich, portfolio manager at Avenue Investment Management
Focus: North American equities

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MARKET OUTLOOK

I think certain sectors of the Canadian stock market represent very strong value for long-term investors at today’s levels. Economic growth continues to expand moderately in both Canada and the U.S., with a continued strong employment trend in both countries. Wage gains are starting to improve, but consumer inflation so far remains muted. Short-term interest rates look poised to move higher as the U.S. Fed continues to normalize interest rates. Long-term inflation expectations, however, remain anchored. A further gradual flattening of the yield curve should be expected. This signals that we're pushing into the later stages of this economic expansion. Over the next six to 12 months, there will be a cyclical tailwind behind the earnings of major sectors of the TSX (financials and energy) and this will provide a strong boost to corporate profits. On this estimation, I believe the TSX should perform strongly over the next year.

TOP PICKS

CVS HEALTH (CVS.N)

CVS is a pharmaceutical benefits manager, retail pharmacy and drug store that has locations throughout the U.S. They're going through the regulatory approval process for their proposed acquisition of Aetna, a healthcare benefits manager. The underlying retail pharmacy business provides a consistent stream of cash flow and CVS has a very strong track record of dividend and share buybacks. The recent noise and policy uncertainty around U.S. healthcare drug pricing has plagued the stock as of recently, but all this negativity is fully priced into the stock at current levels. CVS trades at less than 9 times earnings, with a 3 per cent dividend yield. If the Aetna transaction goes through, there's room for earnings to move significantly higher over the next few years.

CENOVUS ENERGY (CVE.TO)

Cenovus is an energy company based in western Canada. They have a new management team that's focused on cutting costs and rightsizing the business. Cenovus will benefit substantially from higher oil prices, which will allow the company to deleverage their balance sheet. Shares have pulled back recently, which presents a nice buying opportunity.

BANK OF AMERICA (BAC.N)

Bank of America is well positioned to continue to benefit from a strengthening U.S. economic backdrop. Shares trade at 10.5 times earnings and the company pays a dividend of 1.6 per cent and growing. It's also buying back a significant amount of stock. Bank of America has strong operating leverage after years of cost-cutting. Shareholders are poised to benefit as capital continues to be returned through dividends and buybacks.

PAST PICKS: JAN. 12, 2018

CVS HEALTH (CVS.N)

• Then: $78.78
• Now: $64.02
• Return: -19%
• Total return: -18%

BLACKSTONE (BX.N)

• Then: $35.39
• Now: $32.43
• Return: -8%
• Total return: -5%

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $65.11
• Now: $54.46
• Return: -16%
• Total return: -16%

Total return average: -13%