David Baskin's Top Picks: Aug. 29, 2018

David Baskin, president of Baskin Wealth Management
Focus: North American large caps

MARKET OUTLOOK

Robust corporate earnings coupled with continuing accommodative monetary policy has led to the continuation of the equity market rally, particularly in the U.S. While the economies on both sides of the border have shown fairly strong growth, labour markets have continued to surprise with a combination of strong employment growth and very low growth in wage compensation, easing fears about growing inflation.

At the same time, there are some signs that the bloom on the economic rose is starting to fade. In particular, housing markets in the U.S. look quite weak and new auto and truck sales are mediocre. Our view is that investors still have many opportunities to benefit by investing in high-quality companies with sustainable market advantages in sectors which we expect to show continuing growth, including technology, leisure and healthcare.

TOP PICKS

WALT DISNEY (DIS.N)

• NTM P/E: 15.3x
• EV/EBIDTA: 10.7x
• Dividend yield: 1.59%

With the 21st Century Fox deal about to close, Disney shares are a good deal at the current price as they make the transition to a direct-to-consumer environment. Ultimately, we believe that consumers are willing to pay for high-quality content irrespective of the distribution method. Disney’s unmatched portfolio of intellectual property (such as Pixar and Marvel) should help its transition be successful in the long run.

Subscriber losses at ESPN, which has been the main concern over the last few years, have moderated as new over-the-top bundles like Sling and YouTube TV (which all include ESPN) have offset cord-cutting. The parks and consumer products businesses are very healthy, with the company continuing to find ways to raise prices at Disney World every year. We think the market is overly pessimistic about the prospects and continue to be buyers here.

TFI INTERNATIONAL (TFII.TO)

• NTM P/E: 13.6x
• EV/EBITDA: 8.4x
• Dividend yield: 2.6%

TFI, formerly called Transforce, is a major trucking company in Canada and the U.S. that’s benefiting strongly from the economic environment in the U.S. and what the Wall Street Journal calls the “most robust freight market in a generation.” Strong demand and low supply of trucks and labor are leading to soaring freight rates and every trucking company is making money today. TFI’s strategy is to focus on trucking segments and customers that are willing to pay premiums for quality service. It also has a strong track record of making opportunistic acquisitions.  We think the shares are cheap at just 14 times earnings, at a discount to major U.S. trucking peers.

CONSTELLATION SOFTWARE (CSU.TO)

• NTM P/E: 24x
• EV/EBITDA: 18x
• Dividend yield: 0.55%

Constellation Software is kind of like the Berkshire Hathaway of software. It’s a serial acquirer of vertical market software companies with a focus on mission-critical and hard-to-replace software solutions for both the private and public sector. The head office is only in charge of incentives and compensation and major acquisitions, while the acquired businesses are run essentially autonomously. Constellation has had a terrific track record of acquisitions, compounding equity at a 31 per cent rate over the last ten years. Although Constellation is now a lot bigger than it used to be, the CEO has said there are still 30,000 acquisition targets in its database, with additional opportunities outside of vertical market software. We think that the price is reasonable given Constellation’s track record.

PAST PICKS: AUG. 22, 2017

STELLA JONES (SJ.TO)

• Then: $45.30
• Now: $45.08
• Return: -0.5%
• Total return: 0.5%

VANGUARD FTSE DEVELOPED ALL CAP EX NORTH AMERICA (VIU.TO)

• Then: $26.73
• Now: $28.53
• Return: 7%
• Total return: 9%

SCOTIABANK (BNS.TO)

• Then: $77.10
• Now: $75.93
• Return: -2%
• Total return: 3%

Total return average: 4%

TWITTER: @DavidBaskinBWM
WEBSITE: baskinwealth.com