Jun 29, 2018

Chris Stuchberry's Top Picks: June 29, 2018

BNN Bloomberg

Chris Stuchberry , BNN Bloomberg

Chris Stuchberry, portfolio manager at Wellington-Altus Private Wealth
Focus: North American equities

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MARKET OUTLOOK

The year is turning out better than anticipated and we're happy to report most investment themes are performing well in 2018. Our strength remains to be technology investments, highlighted by Twilio, which is up over 100 per cent year-to-date. We're also witnessing great performance in Amazon, Facebook (post-hacking allegations), and Alibaba — all cloud computing companies. Our modern portfolios are performing as planned, and year-to-date, we continue to add to the tech sector as opportunities have presented themselves. We've bought some more Tencent in Q2 and will likely add to other names if opportunities arise over the summer.

The sector struggling in the portfolio is financials, more specifically, European financials. Deutsche Bank has been our worst performing stock year-to-date. The company was forced to fire their CEO and was generally having trouble with their turnaround plan. We also face a contradiction in global monetary policy. In the U.S., we've seen two interest rate hikes, but in Europe, they're actually trying to extend quantitative easing (forcing interest rates down). This has caused both shares of European financials and the euro to fall, both of which hurt our investment. it’s a perfect storm of what we don’t want.

We were surprised to see the damage done to bond yields. It's important to see just how low European bond yields are. Germany is barely 30 basis points, where Canada and the U.S. are 2.10 per cent and 2.90 per cent respectively. Germany is actually down 50 per cnet top-to-bottom in yields this year. In our opinion this isn't sustainable, European yields must go higher, and when they do, we will be very happy owning European financials.

We think "sell in May and go away" remains short-sighted. We continue to believe there is a lot of value in the market, even in the sectors with such great performance. The secular growth trend in the interruption stocks and the digital innovators is still early. Add the fact that these companies generally have terrific balance sheets that make them immune to rising rate environment. As an example, when we first bought Facebook, it grew at 35 per cent year-over-year. It has grown at over 50 per cent for nearly two years. Amazon was growing at 30 per cent when we bought it. Now it is growing at 40 per cent. These companies have accelerated growth.

The recent political skirmishes will certainly cause short-term moves in the markets, but it’s important to note how little it impacts our companies. Tariffs and trade war issues only affect things that are actually produced and consumed, and most of our holdings don't produce tangible goods, they are only services and are unlikely to be affected by tariffs.

We believe the market is still in the process of completing the January correction, and at six-months long, it's a proper correction in our eyes. Looking at the chart above is what gives us optimism. This secular bull market has been led higher by technology companies, and the Nasdaq broke out to new highs in June only to correct down to the old highs. It wouldn’t be surprising to see the main markets take a few more months and join to the upside. That said, it's very possible for the lagging markets to pull the leaders down with them, however, we don't think that is a high probability. As we've said before, the economy remains strong, we don’t think the tax cuts are fully priced into markets and longer term demographics are looking very good for consumption. We just had a 10 per cent equity market correction and have yet to break out higher in major markets.

Our strategy remains unchanged and in this correction, we're going to hold much more cash than usual to prevent any kind of stress knowing we have at least a year of cash flow in client accounts. Second, we will continue to add selectively to financials, technology and strong balance sheet stocks in order to safely navigate this transitional period as global bond markets must normalize over the next one to three years. Once complete, we should be able to safely add some income securities to enhance our cashflow.

TOP PICKS

DEUTSCHE BANK (DB.N)

The worst-performing stock in our portfolio, everything that could go wrong has. We expected European interest rates higher, but they're lower. We expected the turnaround to occur faster, but it's struggled and gone slower, resulting in a new CEO in 2018. An interesting note: when Warren Buffett bought Bank of America in 2011, they'd just lost $8.8 billion in the previous quarter and had massive capital concerns; that investment has earned well over $12 billion since it was made, and it was made in a period of high uncertainty. This is a deep-value investment.

TENCENT HOLDINGS (0700.HK)

We think the trade war has given a good long-term entry opportunity into Tencent. China is in many ways ahead in the integration of digital activities and everyday life. In so many ways, these activities are centred around Tencent’s platforms like Wechat. An online conglomerate with incredible growth, it isn’t easily subject to any tariffs since it's a service company without goods for sale. The balance sheet is solid, with a great growth profile in a secular growth industry.

HOME DEPOT (HD.N)

We think Home Depot is a very sensible place to hide for those looking for growing dividends. Their dividend policy is to pay 55 per cent of earnings per share (EPS) and EPS grows by 20 per cent per year. The average U.S. home is over 40 years old and millennials have only just begun household formation and growing their families, so we believe Home Depot has a terrific tailwind.