Apr 30, 2018

Hap Sneddon's Top Picks: April 30, 2018

BNN Bloomberg

Hap Sneddon , BNN

Hap Sneddon, chief portfolio manager and founder of Castlemoore Inc.
Focus: Technical analysis and macro portfolio strategy

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MARKET OUTLOOK

The current market structure still reflects a positive pro-growth and rising inflation view with financials, energy, materials, discretionary, industrials and technology showing positive relative strength on an intermediate or investment (versus trading) timeframe. Defensive and interest-rate sensitive sectors such as utilities, bonds and consumer staples have been weak on this same timeframe, yet they’re now picking up on the shorter term. This state of the cyclical versus defensive narrative reflects an ongoing and simultaneous evaluation of projected corporate earnings and economic impact from higher rates.

Housing, jobs, inflation (growth) and earnings data are decent-to-excellent, while retail sales, wages, manufacturing and capital spending are underwhelming.

Rising rates at the U.S. Federal Reserve (the Bank of Canada is trying its best) were quietly a watershed event 12 months ago well before the markets began pricing them in more recently. Time will tell how this second phase of central bank experiments plays out and if they’re appropriately getting in front of the curve or trying to manufacture investor consensus.

If we’re yet early for rate normalization (that businesses, governments and individuals really can’t handle a steady march higher in rates), the short-term strength seen now in the defensive and interest-rate sensitive securities will carry on. In the meantime, pro-growth investment expectations are the primary market driver in spite of recent volatility and relative weakness.

TOP PICKS

SNC-LAVALIN (SNC.TO)
Bought at $56.61 on April 7, 2017.

SNC is a multifaceted engineering and construction business that represents both cyclical and defensive sectors including oil and gas, mining, fertilizer, power and renewables, and infrastructure builds and operations. The stock, which now has its bribery scandals in the rearview and which has been basing or trendless for more than seven years, has advantages as a global provider: it can participate in public and private partnerships (airports, toll roads, power), and it can do solo bids due to the depth of services for large, complicated or remote projects. It’s also very positive technically. Vanquishing sellers $60 will bring a swift move higher. One-year target: $75.

MERCK & CO (MRK.N)
Bought at $57.07 on Dec. 13, 2017.

Merck is through the worst of the impact of its patent cliff from generic drug competition and is now holding a decent and diversified lineup of high-margin compounds. At current prices and valuation, the stock offers a compelling risk-to-reward in a sector that’s one of the few in a secular bull market. The May 1 earnings release is expected to show positive sales results from its lung cancer treatment Keytruda, a monotherapy (versus combination or polytherapy such as chemotherapy) drug and a further broadening of its pipeline. One-year target: $71.

KIRKLAND LAKE GOLD (KL.TO)
Bought at $17.28 on Dec. 11, 2017.

This timely mid-tier gold company is a standout in a sector that hasn’t fared well over the last few years. Q4/17 earnings were in-line and well received, with the highlight being the announcement of that reserves increased 31 per cent year-over-year. More recently positive production numbers and a mine life extension note also bode well for Q1 earnings coming May 2 as does the technical breakout at $21. One-year target: $27.