May 20, 2016

Cameron Hurst's Top Picks: May 20, 2016

Michael Chu, BNN Bloomberg

Cameron Hurst , BNN

Cameron Hurst, senior VP & chief portfolio manager, Canaccord Genuity Wealth Management

FOCUS: U.S. Equities

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MARKET OUTLOOK:

We have a more balanced view of the risk-return equation at present: No shortage of things to worry about, but most appear likely to resolve favourably. And with a “wall of worry” to climb, markets could appear more dangerous than they turn out to be. For example, Trump is the presumptive GOP candidate and yet a potentially highly destabilizing force. He has made a run of it by lashing out at big business, ethnicity, religion, immigrants, even politicians, but now surveys are starting to show galvanized support for Hilary as a result of his negative strategy.

FT polled 53 Washington-based trade associations representing >100,000 businesses and >$3.5trl in annual revenues. 63 percent of members said Hillary Clinton’s policies align best with their interests on trade. 71 percent of members said Hillary Clinton’s policies align best with their interests on immigration.

Markets fare the worst with uncertainty and volatility, which a Trump win seems sure to bring.

56 percent of trade associations said members’ ability to do business outside the U.S. had already suffered as a result of the unpredictability of the campaign. So while Trump winning the oval office would be negative for risk assets (buy gold!), it appears as though his malignant political strategy is starting to backfire.

Brexit looks much the same, although a potentially even more damaging economically. However, we expect it will go much the same as the Scottish referendum where the polls were essentially even until about 4 weeks before the vote, at which time the swung decisively towards staying.

Ad for Fed rate increases, likely to see a couple hikes this year, but it’s not as if we’ll see 3 or 4 percent 10yr yields. Another 50bps on Fed Funds will not break the markets, change employment decisions or turn homeowners upside down on their mortgages. The Fed is highly attuned to not raising too fast, so this will add volatility but not fundamentally undermine the market as a whole.

Adding to the comfort for a positive medium-term outcome for markets is an unusual technical signal that flagged in later March, when over 90 percent of the stocks in the S&P 1500 index trade above their respective 50 day moving averages, the S&P 500 never posts a negative 12 month return.

We looked back as far as 1970 and every time you get the breadth thrust of that magnitude, the SPX is higher 12 months later. This doesn’t mean we can’t have near-term volatility, but it’s a strong signal that you should be picking spots to put money to work.

This being said, the bull market is decidedly mature and being selective is increasingly important. We’re still overweight U.S. equities, but being more selective. Industrials represent leadership and we’re overweight there. We have come around to Canadian exposure recently with stabilizing commodities, a more competitive loonie, and significant infrastructure spending stimulating the economy in the right ways. Golds look interesting for the first time in years, driven by both negative rates around the globe and a long-awaited supply/demand improvement.

Top Picks:

UnitedHealth Group (UNH.N)

UNH is the largest Medicare contractor in the U.S., as well as a top pharmacy benefits manager and Medicaid provider. Supported by secular trends in Medicare and Medicaid, the company has significant demographic tailwinds for years to come.
Best-in-class management is well-placed to sort through challenges faced by all managed-care operators related to ACA and public health exchanges
Management has an established track record of beating earnings estimates and raising guidance, while delivering consistent mid-teen EPS growth and returning about 50 percent of annual cash flow to shareholders as dividends and share buybacks. PEG ratio of ~1x right now is unusually inexpensive for company like this.
At present there is some noise in the name (and managed care industry generally) owing to Affordable Care Act challenges, but management’s proactive and transparent approach helped the stock weather the noise well.
Last quarter they were back to fighting form and beat on both top and bottom lines, even while booking additional charges for public health exchange/ACA headwinds.
Recently announced with significant contract win with CalPERS, so momentum continues.

Schlumberger (SLB.N)

Positive on industry-leading execution and its integrated business model.
Schlumberger executes better than its peers, being the one of the first companies to respond to changing market conditions. Through the downturn it reported industry-leading margins, return and FCF which was accomplished through proactive cost cutting (laid off 34,000 employees in 2015 representing 26 percent of its workforce) and the continuation of its internal transformation program.
The internal transformation strategy is focused on improving technology, reliability, efficiency and integration. The downturn has allowed the company to implement different areas of this strategy faster than expected.
The market share driven oil strategy will likely result in more moderated oil prices compared to what we have seen in the past. This will put greater emphasis on cost control, forcing operators to squeeze even more efficiencies out of each well. As a result, Schlumberger’s differentiated technologies and business model should outperform in the next cycle vis-à-vis competitors.
The recent acquisition of Cameron International highlights the company’s successful approach of acquiring companies in a downturn and using the combined synergies to drive costs out of the business. Thereby improving operational leverage during the next cycle.

Franco-Nevada (FNV.N)

High quality diversified portfolio, with upside optionality to gold and resource discoveries.
Royalty and streaming businesses offer several advantages over investing in the underlying mining companies, including a lower risk business model and increased diversification. Because of this, Franco-Nevada will underperform operators in a favourable gold environment while being more defensive if conditions deteriorate. In other words, it is a safe way to play gold.
The company’s strong balance sheet with current liquidity of approximately $1.2bln ($128mln cash and $1bln credit) and no debt provides significant opportunity for further transactions during a time when producer and competitor balance sheets are not as flexible.
The stock trades at a premium to its long-run average on EV/EBITDA and when compared to its royalty/streaming peer group. While this might be off-putting, we see it as a testament to the company’s successful track record and strong balance sheet. This could also give the company a stronger position to compete for new high-quality royalty and streaming deals.
Management has a proven track record of accretive transactions, steadily increasing its gold equivalent ounces (GEOs).
Investor sentiment has turned during a flight to safety with ETF flows accounting for the bulk of increased gold demand.

Disclosure	Personal	Family	Fund/Portfolio
UNH	N	N	Y
SLB	N	N	Y
FNV	N	N	Y

Past Picks: August 21, 2015

Home Depot (HD.N)

Then: $116.16
Now: $132.65
Return: +14.20%
TR: +15.92%

Monster Beverage (MNST.O)

Then: $138.91
Now: $148.19
Return: +6.68%
TR: +6.68%

UnitedHealth (UNH.N)

Then: $116.28
Now: $131.30
Return: +12.92%
TR: +14.36%

Total Return Average: +12.32%

Disclosure	Personal	Family	Fund/Portfolio
HD	N	N	Y
MSNT	N	N	Y
UNH	N	N	Y

Fund Profile

Canaccord ETF Capital Appreciation Portfolio

Performance as of: April 30, 2016

3 month: Fund +0.6%, Index*+0.9%

1 year: Fund -0.1%, Index*-1.8%

Inception: Fund +4.4%, Index*+3.4%

* Index: 10% FTSE TMX Canada Short Term Bond Index, 10% FTSE TMX Canada Universe Bond Index, 20% S&P 500 Index, 30% S&P/TSX Composite Index, and 30% MSCI EAFE Index

*Returns net dividends

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