Full episode: Market Call for Friday, July 13, 2018
Hap Sneddon, chief portfolio manager and founder of Castlemoore Inc.
Focus: Technical analysis and macro portfolio strategy
A rebound in economic data failed translating to strength in equity benchmarks in June as trade headlines dominated the price action, particularly in the back half of the month. Since then, however, the S&P 500 Index is up by 3 per cent and the Nasdaq 4 per cent as a result of a return move towards cyclical and non-cyclical growth (tech) investments by investors.
Global trade developments aside, the lurch towards defensives we saw in June is part of historical price action that stems from portfolio managers rebalancing their books ahead of the end of the second quarter — they want to sell their winners and rebalance to defensives.
Monthly momentum indicators on the large-cap benchmark have rebounded after threatening to roll over and trigger sell signals for the first time since the start of 2015. The bull market is still here until further notice.
This said, the month of July has many moving parts for active, conservative managers in the shorter term: Healthcare and biotech are still this side of the halfway point of their seasonality, which begins in June; the broad market and both cyclical and non-cyclical growth sectors historically peak mid-month; and energy, gold and defensive sectors start their periods of seasonal strength.
Though defensive and interest-rate sensitive (non-banks) investments have started to show some nascent strength in that June rebalancing time, the summer rally provides an opportunity to add to these areas before current economic and geopolitical events do their part in providing the “why” of our technical forecast.
As always, the final arbiter of an investment thesis is price and price always extends more than forecast.
Bought May 29, 2018 at $50.56.
Dollarama is a Canadian consumer staples retailer in the high value, small format segment. Recent earnings were slightly behind expectations, but the focus on its international growth is being well received. Near-term expectations are high that it will take a majority stake in its Dollar City partnership in Latin America. Increased earnings per share guidance for 2019 and 2020, raised share buyback allowance and a growing capital expenditure marry well technically over the next year, resulting in our forecast of $58.
Bought July 13, 2018 at $55.95.
This “fresh pick” is still hot out of the oven and timely with the sector turning up. The stock had been pushed down by overblown interest rate and growth trend concerns. Upcoming earnings on August 2 are expected to show modest revenue and earnings increases, a decent wireline trend (Internet bump and Alarm Force tuck-in), a slight decrease in media and rising margins in wireless. We have a $64 target. A 5.5 per cent dividend is also not bad.
MERCK & CO (MRK.N)
Bought Dec. 17, 2017 at $57.069.
We first purchased Merk back in December based on a technical basing forecast after a period of poor execution, but more notably, a lack of growth drivers. In the interim the stock has moved higher in part due to entering its strong period of seasonality along with the entire healthcare/pharma/biotech industries. If Merck has legs following the end of the period, it will because analysts’ calls for underwhelming sales assumptions on Keytruda, Januvia, and Gardasil and for lower margins were shy. First target: $74.
PAST PICKS: JULY 20, 2017
AGF MANAGEMENT (AGFb.TO)
- Then: $7.21
- Now: $6.62
- Return: -8%
- Total return: -4%
ACCENTURE PLC (ACN.N)
- Then: $128.54
- Now: $168.17
- Return: 31%
- Total return: 33%
ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO)
- Then: $11.59
- Now: $13.75
- Return: 19%
- Total return: 21%
Total return average: 17%
CastleMoore CDN Equity Portfolio
Performance as of: March 31, 2018
- Annual RoR since Sept. 2012: 7.68% fund, 4.83% index
- Average drawdown: -3.99% fund, -7.50% index
- Average recovery (months): 6.9 fund, 15.7 index
* Index: TSX Composite, net of fees and dividends re-invested.
TOP 5 HOLDINGS AND WEIGHTINGS
- Open Text Corp: 7.0%
- Kelt Exploration Ltd: 6.3%
- Sun Life Financial Inc: 5.7%
- Kirkland Lake Gold Ltd: 5.6%
- Bombardier Inc: 5.6%