Hap Sneddon, president and portfolio manager at CastleMoore Inc. 

Focus: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK
The oft-late and oft-touted reflation trade is getting some chinks in its armour. Weakness in financials best reflects this. Though sentiment data (soft) have been strong recently, economic data (hard) has been declining. To wit, the U.S. 2016 GDP at 1.6 per cent versus 2.5 per cent in 2015, falling weekly hours, tepid capital spending and real household income and low inflation. This can be easily visualised by a flat U.S. Treasury yield curve. If the reflation trade was imminent, the yield curve would be not steepening nor would the strongest sectors include utilities, health care and staples.

This said, markets will reconcile the differences between sentiment and data (quickly, too, as the cycles are very short now and are an inherent feedback loop), something forecast by current technical conditions, and will present buying opportunities over the next few months. As we bookend the 2008 crisis and rally into the year’s end and possibly early 2018, opportunities may be greatest in fact in the reflation or pro-growth trade. However, commitments will need to be maintained in defensive themes beyond this run, creating portfolio “convexity,” as deep structural challenges remain for individuals and businesses, and the final chapter of the crisis nine years ago is written.

TOP PICKS

WAL-MART (WMT.N) – December 20, 2016 at $71.86
Wal-Mart is in a sector showing longer-term relative strength improvement after a decline based on increasing competition, particularly online, and general weakness in defensives that began last August. The company’s Q4 update was positive with an earnings beat and top-line growth. The U.S. business was a stand out, too, with comp gains of 1.8 per cent versus consensus of 1.3 per cent. Its e-commerce initiative is on track (planning to take share from Amazon), it is showing an increase in perishable sales which will drive sales volume, and it is well prepared to succeed in China through its JD.com and New Dada partnerships. Target US$85.

SNC-LAVALIN (SNC.TO) – January 18, 2017 at $56.42
At current levels SNC is about valuation in a few sectors (infrastructure, power, and oil & gas) that have modest to exceptional tailwinds. While Q4 showed a beat, questions around future guidance and free cash flow rates have hit the stock price, and accordingly, we think this presents an inexpensive entry for investors. The company was expected to be in acquisition mode in 2017 and did not disappoint with the recent bid for WS Atkins. This acquisition, if it goes through, is very accretive to cash flow in the first year. In addition, the valuation for the 407 ETR has been raised. SNC’s two core strategies of being a global turnkey solution and its commitment to public/private partnerships, along with rumoured further contract announcements, will refocus investors on the name after several years of underperformance. Target $83.00.

OPENTEXT (OTEX.TO) – November 24, 2016 at $42.38
OpenText, a core tech holding for Canadian investors, has been an acquisition growth story, but underappreciated in this strategy has been its simultaneous increase in recurring revenue, which now stands at 72 per cent. The company has laid out a strategy to double its EPS by 2020, raise its cloud business to 50 per cent (margins of 90 per cent) and increase its organic growth. Target $51.00.
 

PAST PICKS: MARCH 16, 2016

AECON (ARE.TO)

• Then: $16.12
• Now: $17.18
• Return: +6.57%
• TR: +10.40%

COCA-COLA (KO.N)

• Then: $45.05
• Now: $42.69
• Return: -5.23%
• TR: -2.03%

SAPUTO (SAP.TO)

• Then: $40.42
• Now: $46.02
• Return: +13.85%
• TR: +15.39%

TOTAL RETURN AVERAGE: +7.92%