Cameron Hurst's Top Picks: Feb 8, 2018

BNN Bloomberg

Cameron Hurst , BNN

February 8, 2018
Cameron Hurst, Chief Investment Officer at Equium Capital Management
FOCUS: U.S. Equities
_______________________________________________________________

MARKET OUTLOOK:

Historic indicators of capitulation:

Advance decline ratios – best to look at A/D in the context of volume ratios as well, just to make sure it’s a meaningful data point statistically
- Monday had a meaningful spike in declining issues and declining volume in the context of meaningfully higher total volumes, which is required to reach the point of selling exhaustion
- Typically you want to see a follow through day to really wash out the selling pressure, but that can also be done with a week or two of sideways consolidation
Put/Call ratio – can give you an indication of risk-on and risk-off sentiment
- Put buying spiked (indicates increased hedging) driving the P/C ratio higher on Monday to levels consistent with a material bearish change in sentiment
- Before we can resume another leg up in the markets, presuming that’s the ultimate outcome of a short-term drawdown, selling pressure needs to be exhausted; the P/C ratio offers an indication of whether investors are leaning into risk positions or pulling back from them
Volatility – measures of volatility rising to historically elevated levels is typically a good indication that short-term traders and other loose leaves have been shaken out of the tree, also required for markets to “reset” and begin attracting new marginal buyers
- Given the spike in volatility was a new historical record, even compared to the financial crisis, and was principally responsible for the accelerating equity sales, it stands to reason there’s been significant progress on this front as well
Very broadly speaking, it seems like we may have sufficient short-term indications to come out from the bunker in the coming weeks, and if so, we’ll look at reapplying risk in a very tactical manner
What gives us some comfort that there’s room for tactical longs near-term:
- Corporate credit spreads have been extremely well-behaved throughout the sell-off
-The issues appear to be ring-fenced within the volatility complex and a few volatility-related exchange-traded notes (NOT the same as ETFs)
-Corporate earnings are absolutely stellar and companies globally have the best revenue growth in many years
-Global economic backdrop is exceptionally strong and valuations, while elevated, are nothing like 1999/2000
As the markets find their footing over the ensuing 1-2 weeks post-decline, we need to watch market breadth and price levels; if breadth is weak and/or should we fail to make a new near-term price high, it will most likely mean it’s time to get more defensive.
If we do stabilize and rally to a modest new high, it shouldn’t be taken to mean we don’t retest the lows within a month or two; we’re into a process that takes time and tactical positioning will be the key to surviving it
Summer and early fall in 2011 as well as the same period in 2015 are likely good analogues for those seeking a roadmap; the primary difference between then and now would be a vastly stronger economic and earnings backdrop this time through the ringer
Also remember the interest rate environment is different this time
- Investors cannot simply run into bonds and bond proxies because of higher yields on the back of monetary tightening
- Stick with short duration fixed income exposure or cash if seeking refuge from weakening risk assets

TOP PICKS

Raytheon (RTN.N)

Sector	Industrials > A&D	Market Cap:	US$58.14B
Performance:	1YR Absolute +41%	1YR vs. Industrials +21%	1YR vs. S&P500 +21%
Valuation:	Top Line Growth FY17 +5% FY18 +5% FY19 +5%	EPS Growth FY17 +10% FY18 +29% FY19 +15%	P/E Multiple FY18 20.3X FY19 17.7X

POSITIVE - like RTN’s specific defence market exposures (missiles & missile defense) and its higher margin int’l exposure. Buy on recent market pullback.
Positive on defence generally - Within US DoD budget pivoted towards growth and seeing foreign defence budgets move higher both driven by heightened threat environment globally.
RTN geared towards current defense market priorities (missiles & missile defense):
- DoD focused on missile spending versus ISIS/NK.
- Noted opportunities for missile defence sales to Poland, Romania, Sweden and Japan.
- Q4 strength missiles drove +15% revenue growth for this segment and expected to grow 9% 2018.
Platform ‘agnostic’ – RTN subcontract into major defense programs but are not main supplier therefore mitigates risk of Trump interference (as seen with LMT (F35) & BA (Air Force One).
Leader in international defense sales (31% revenue) which are higher margin sales (typically mature programs). Foreign Military sales approvals more than doubled in FY17 – positive trend for RTN.
Diverting some tax savings into 2018 capex with a focus on infrastructure, high tech production facilities and factory automation in an effort to support growth.
Made discretionary pension contribution in 2017 - taking advantage of the higher 35% deduction before tax rates drop in 2018 to 21%. Lowers 2018-2020 required pension contributions therefore provides a boost to FCF in 2018/19/20.
Strong Q4 reporting season – Top and bottom line in-line. 2018 revenue guidance 4-6% (raised from 3-5%) expected to be led by Missile Systems segment.
Trading broadly in-line with peer group average 21.0x (2018 P/E). Valuation looks reasonable given RTN’s specific defence market exposures and higher margin int’l exposure.

Edwards Lifesciences (EW.N)

Sector	Healthcare > Med Tech	Market Cap:	US$26.89B
Performance:	1YR Absolute +43%	1YR vs. Health Care +23%	1YR vx. S&P500 +24%
Valuation:	Top Line Growth FY17 +16% FY18 +11% FY19 +10%	Bottom Line Growth (EPS) FY17 +31% FY18 +19% FY19 +13%	P/E Multiple FY 18 27.6X FY19 24.4X

POSITIVE – one of the best growth stories in MedTech space with new product launches and expansion into new markets expected in 2019.
Like the MedTech space generally – escapes the drug pricing debate and is exposed to positive secular trends: aging population, obesity epidemic, emerging market demand.

EW’s is a leader (60% revenue) in the TAVR (transcatheter aortic valve replacement) market.
- WW TAVR market expected to reach US$5b by 2020 from US$2.5b 2017. This creates a huge opportunity for growth and should lead to at least DD sales CAGR for this business line to 2021.
- Among the growth drivers within TAVR are low risk indications, next generation valves and expansion into emerging markets.
- TAVR revenues +20% 4Q17 - seeing rising demand for TAVR at hospitals that are acknowledging the superior outcomes relative to surgical valves.
- Expect a number of key product approvals in TAVR both within the US and Europe in the coming months (CENTERA and SAPIEN)
EW is also a key player in the TMVR (transcatheter mitral valve) market.
- Mitral valve disease is the most common type of heart valve condition in the US suggesting TMVR market could be 4x-5x TAVR in future.
- EW forecast US$1b WW TMVR by 2021 - implies 25% CAGR between 2018 and 2021.
Strong 4Q – Beat on top and bottom line reflecting global TAVR outperformance with upside in both the US and OUS. 2018 guidance of 9-10% topline growth and 17-22% bottom line growth most of which driven by TAVR market.
Trades at a premium to peer group average 19.3x (2018 P/E) – premium reasonable given EW’s leadership position in high growth markets (TAVR, TMVR).

CME Group (CME.O)

Sector	Financials	Market Cap:	US$54.4B
Performance:	1 YEAR +43%	1 YR v Financials +20%	1 YR v S&P 500 +24%
Valuation	Top Line Growth CY17 +1% CY17 +8% CY18 +7%	EPS Growth CY17 +5% CY18 +32% CY19 +10%	P/E Multiple CY17 33.6x CY18 25.3x CY19 23.2x

POSITIVE – Market structure players should benefit from higher general volumes and increased hedging activity as global markets return to more normal vol environment
CME is dominant derivatives exchange focused in interest rate, energy, equity and ag commodity options – all of which should be active spaces in return to “normal” or corrective markets
January 2018 vs. January 2017 volumes higher across the board, e.g. rates +14%, equities, +22%, energy +23%, etc., and that was BEFORE February market rout
We expected interest rates business (26% of revenue) to experience strong acceleration as rates normalize and global central bank accommodation is removed, i.e. return to a normal environment
Market data is a stable, high-margin business, but only 11% of revenue, so volumes are key
Management committed to returning cash to shareholders through both regular quarterly dividends and specials once a year (returned US$9.6bln since 2012), yielding attractive 4-5% annually
Possible there’s a much larger special dividend this year because of tax windfall and high FCF, which can be used as rough measuring stick for their annual specials
- Could be as high as US$6-US$7 this year, which would be a ~4% yield just on the special

Disclosure	Personal	Family	Portfolio/Fund
RTN.N	N	N	Y
EW.N	N	N	Y
CME.O	N	N	Y

PAST PICKS: February 8, 2017

Alphabet (GOOGL.O)

Then: US$829.88
Now: US$1031.17
Return:24.25%
Total Return: 24.25%

E*Trade Financial (ETFC.O)

Then: US$35.06
Now: US$50.30
Return:43.46%
Total Return: 43.46%

Honeywell (HON.N)

Then: US$119.73
Now: US$149.03
Return:24.48%
Total Return: 27.02%

Total Average Return: 31.57%

Disclosure	Personal	Family	Portfolio/Fund
GOOGL.O	N	N	Y
ETFC.O	N	N	Y
HON.N	N	N	Y

Fund Profile
Equium Global Tactical Allocaton Fund
As of January 21, 2018

Performance

1 Month: *New Fund
1 Year: *New Fund
3 Year: *New Fund

* Regulations prohibit publishing returns until after 1 full year of track record has been established

Benchmark is comprised of 60% equity (15% S&P/TSX Composite Index, 45% MSCI World Index) and 40% bonds (20% Bloomberg Barclays Canadian Aggregate Bond Index and 20% Bloomberg Barclays U.S. Aggregate Bond Index). Returns are based on reinvested dividends.

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