The SPX has moved into a significant resistance zone between 2,050 and 2,100 amid strongly conflicting data points. The 14% rally off mid-February lows feels much better, not least because of the accompanying 61 percent rally in WTI.  While there are reasons to be more positive, we feel strongly this is not the time to increase exposure to risk assets.  Bear markets are characterized by short, sharp rallies that really hurt portfolios and challenge convictions, which is why an unemotional process is so important. 

TOP PICKS:

MasterCard (MA.N) 

The secular thesis behind MasterCard and Visa remains much the same as a few years ago: the combination of 5 percent growth in global core consumer spending plus an increasing share of payments being made by electronic means on the cards’ networks. People continue to use cards for ever-smaller purchases and that trend accelerated with Tap & Go.  The company recently updated long-term guidance to mid-teen EPS growth based on very steady revenue growth. We really like this kind of predictable and highly cash-generative business model.   China is possible as a new market in 2016, although much relates to regulatory progress, so there’s also an option on that growth in the future. Slower global growth is a headwind because of reduced consumer spending; however, MA is better insulated than most and FCF can be used for accelerating buybacks on weaker share prices.

Coca-Cola (KO.N)

Over the years tension had been rising between Coca-Cola and its bottling partners over the price Coca-Cola charged for concentrate, packaging options and promotional spending. In 2010, Coca-Cola re-acquired its North American bottling assets from Coca-Cola Enterprises (now Coca-Cola European Partners). The motivation for the acquisition was to reduce costs in the bottling system, improve distribution and align the interests of bottlers and Coca-Cola. As you can imagine, the bottling and distributing cans of Coke is significantly more capital intensive and has lower profitability than simply selling concentrates and syrups. As a result of the acquisition (as well as macro weakness and slowing CSD consumption), return on investment capital declined by almost half to ~20 percent in 2015.  Over the past ~18 months Coca-Cola has been refranchising/selling bottling assets, aligning bottler interests and returning to its asset light business model which should improve ROIC to ~30 percent. The company plans to refranchise 100 percent of North American bottlers by the end of 2017 (currently 40 percent), which is ahead of previous guidance of 2/3 by 2020. Coca-Cola has been selling N.A. bottling assets to Swire Coca-Cola, Coca-Cola Bottling Company United and Coca-Cola Bottling Consolidated. Additionally, the company has been selling bottling assets in Europe, Africa and China. Upon completion of the refranchising, Coke will reduce its company-owned bottling operations from 18 percent to 3 percent of the total Coke bottling system volumes.   In addition to refranchising efforts, Coke has been cutting costs, investing in marketing and benefiting from a stronger U.S. consumer.

Safety trade with limited downside risk. 

Fiserv (FISV.O)

Fiserv is a financial services technology company that has two business segments: payments and financial. The payments segment processes electronic payments for financial institutions and other customers. This includes debit and credit card processing services, internet and mobile banking software and services, electronic bill payments and ATM and point of sale PIN-based debit transaction processing. The financial segment provides software and services to financial companies to manage deposits, loans, security, client statement generation, check clearing and loan origination. Fiserv has a 35 percent processing market share and generates 95 percent of revenue from U.S. FIs. 

Past Picks: Dec. 22, 2015

TJX Companies (TJX.N)

Monster Beverage (MNST.O)

Mastercard (MA.N)

Total Return Average : -1.97%