Darren Sissons, vice-president and partner at Campbell, Lee & Ross
Focus: Global and technology stocks
MARKET OUTLOOK
The markets are currently prone to wild swings in volatility. Intraday movements indicate a high degree of day trading and/or algorithmic trading as markets typically open lower and end higher or vice versa. The underlying narrative is one of growing fear over a second COVID wave. That fear is misplaced due to the following considerations: First, the Black Lives Matter protests indicate how short and frayed tempers are. The general population and broader business community largely have limited appetite for continued lockdown. Third, monetary stimulus is gushing at high volume across the globe and reflects Mario Draghi’s famous comment: “Do whatever it takes.” Fourth, fiscal stimulus in the form of direct financial support to citizens will continue (CERB, then U.I. and other programs). Fifth, the U.S. Main Street Lending program enables direct Federal Reserve (government) lending to medium and large businesses and will support an economic recovery. This excellent U.S. initiative will likely be adopted in other geographies and/or will be additional stimulus for “shovel-ready” infrastructure programs once the lockdown ends.
Looking near term, second-quarter financial reports will be truly horrific for many companies. They will reflect a full COVID lockdown quarter, not the three weeks reflected in first fiscal quarter reports. The extent to which investors look through these dire results will depend on management forward guidance, continuing government stimulus, expectations for the broader economy, a vaccine and investor thoughts on how broader communities will manage COVID in a post-lockdown environment.
Overall, our thesis remains the same. First, this too will pass, so do not panic. Second, be opportunistic and use market sell-offs to upgrade portfolios by adding high-quality franchises priced at a discount. Use upward market surges to eliminate positions that no longer make sense.
TOP PICKS
ACCENTURE PLC (ACN NYSE)
Last purchased at US$199.80.
We favour IT consulting for its high-margin, structural growth. It is effectively an unavoidable tax on Fortune 2000 companies. Major global corporations outsource substantial IT expenditure to lower costs and this thematic will continue in the post-lockdown environment. Accenture’s dividend currently yields 1.60 per cent. Its revenue, net income and dividend have grown in Canadian dollars at an average annual growth rate of 9.4, 10.8 and 21.7 per cent for 10 years. Accenture has eliminated 9 per cent of shares outstanding over the same 10-year period.
ATCO LTD (ACO/X TSX)
Last purchased at C$37.77.
ATCO is a Canadian dividend aristocrat that has increased its dividend for 27 consecutive years. Its business is anchored in Alberta and it operates regulated utilities in Canada and abroad. The stability of the regulated assets will drive dividend predictability. Revenue, net income and the dividend have grown at average annual rates of 4.2, 2.9 and 12.5 per cent respectively over 10 years. Based on our analysis, the stock trades at a deep discount of 15 to 40 per cent below its historical valuation range.
AUCKLAND INTERNATIONAL AIRPORT (AIA NZX)
Last purchased at NZ$7.21.
This is an inexpensively priced tolling business currently priced at a steep discount. Management successfully navigated the COVID lockdown by extending debt maturities, raising additional capital, cutting the dividend and currently have 24 months of cash reserves at zero revenue. A gradual normalization of air travel and continuation of air cargo services will drive increased passenger volume, parking and other concessions. Looking forward, the company will build an additional runway as planned and will continue property development on owned land. A dividend re-introduction will be a share price catalyst.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ACN | Y | Y | Y |
| ACO/X | Y | Y | Y |
| AIA | N | Y | Y |
PAST PICKS: JUNE 11, 2019
BP PLC (BP NYSE)
- Then: $42.34
- Now: $23.68
- Return: -44%
- Total return: -38%
MUNICH RE (MUV2 ETR)
- Then: €220.50
- Now: €228.40
- Return: 4%
- Total return: 9%
VODAFONE (VOD NASD)
- Then: $16.47
- Now: $15.91
- Return: -3%
- Total return: 2%
Total return average: -9%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BP | N | Y | N |
| MUV2 | Y | Y | Y |
| VOD | Y | Y | Y |
TWITTER: @KiwiPMI
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