FOCUS: North American Large Caps

Market Outlook:

Recent data from the U.S. show that the economy there is in reasonably good shape, with ongoing job creation and very low inflation. While corporate earnings for the 4th quarter were far from robust, indications are that the housing and automotive sectors are seeing good demand. U.S. consumers have increased savings and reducing leverage by impressive amounts, setting the stage for a resurgence of consumer spending on both durable and non-durable goods. Given the persistence of low interest rates, quality equities are very attractive at current prices. In Canada the impact of the greatly devalued Canadian dollar now being seen in better export and manufacturing data. Canadian bank earnings were quite strong, suggesting that there have not yet been any serious spill-over effects from the weakness in the energy sector. We see good value in Canadian banks, utilities, REITs, telecoms and specialty situations.

TOP PICKS:

General Motors (GM.N) 

Price: $30, Market Cap: $46b, P/E: 5.9x , EV/EBITDA: 4.8x

GM shares fell despite record 2015 results and strong guidance for 2016 and are now trading at a baffling 4.8x EBITDA. Since the recession and the Government bail-out, the company has done everything it promised: lowered costs, fixed the balance sheet and repurchased shares. Free cash flow in 2015 was hit by $2.5B of one-time items such as restructuring/recall/legal items. Excluding these, free cash flow is closer to $4.7B and this will support additional share repurchases. North America should have an additional $1.4B in cost savings for 2016. There is a strong pipeline of new vehicles with improved profit margins.

Berkshire Hathaway (BRKb.TO) 

Price: $205,500, P/B: 1.3x

The Oracle himself says that the intrinsic value of Berkshire far exceeds 1.2x book value, which is the threshold for its repurchases of shares What is often missed is that Berkshire is a very decentralized organization, Buffett does the capital allocation, but Berkshire is a collection of extremely high quality businesses run by what Buffett calls as “world-leading” managers. Berkshire’s annual report leaves readers amazed by the quality of the subsidiaries (by this, meaning companies like GEICO, Berkshire Energy, Marmon). We think Berkshire should be able to grow book value organically by 10 percent in the long-run.

Golman Sachs (GS.N) 

Price: $154 , Market Cap: $65b, P/E: 11.6x, P/BV: 0.8x  

Goldman Sachs is a high quality business trading at 0.8x book value. It has done well in recent years in controlling expenses, excluding litigation costs should go down from 63 percent now to 57 percent in 2017. After settling with the government in January, legal issues relating to mortgage backed securities are now behind Goldman and legal reserve has accordingly been lowered from $5.3b to $2b. Goldman commercial banking has a very low level of funded energy exposure compared to its peers and has been the most aggressive in reserving for losses. We also think Goldman is well- positioned to take market share in Europe as banks there continue to restructure. 

Past Picks: Mar. 24, 2015

Express Scripts (ESRX.O)

Crombie REIT (CRR_u.TO)

Goldman Sachs (GS.N)

Total Return Average : -8.39%