Hap Sneddon's Top Picks: June 15, 2018

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

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MARKET OUTLOOK

Markets are now considering more the impact on stocks, particularly the growth complex, from higher rates. The U.S. Federal Reserve is the only major central bank that is full steam ahead on raising, with the recent statement this week being interpreted by investors as indicating two more rate hikes laying ahead this year, yet the 10-year U.S. treasury yield has not made a new high.

Growth stocks are still the place to be. Some defensive or interest-rate sensitive areas, however, are showing some relative strength as many are basing or coming off lows. This situation doesn’t answer fully the impact of higher rates (and trade friction), but it does present a good risk-to-reward.

This push-and-pull between pro-growth and defensives is largely being driven by U.S. inflation prints that are at multi-year highs from increased wage expectations.  But economies seem susceptible to the remedy for inflation in that expectations are rising for softer activity in 2019 and yields haven’t made new highs in light of the data.

In the meantime, the approaching summer period normally sees a tilt towards staples and utilities and away from the cyclicals such as industrials, base metals and materials. What isn’t clear yet is if this situation may carry on beyond the normal seasonal end and become a bigger market theme in the fall and into 2019.

TOP PICKS

ALTAGAS (ALA.TO)

AltaGas has several lines of business: NGL extraction and terminaling, gas gathering and processing, power generation, utility distribution and energy management service. When combined with the technical read, these make it a timely purchase today. While the last year or so hasn’t been good to shareholders, the recent announcement of the sale of some of its B.C. hydro assets well above expectations is improving investor views of the company. Another potential catalyst ahead is the final approval of the $9-billion purchase of WGL Holdings the week of June 25th. In moving toward our target of $30, expect some volatility from moves in rates and a potential future equity offering.

IAMGOLD (IMG.TO)

Gold producers are coming into the period of seasonal strength in July, but they also have some bigger tailwinds from an apparent stabilization in gold bullion underway. The trajectory of the U.S. dollar higher is having a negative impact on emerging market equities and especially emerging market debt, but not Iamgold. This divergence is setting up the company, a high-quality producer whose recent earnings beat on all measurements including much lower cash costs than expected, for a strong upside ahead. A drop below $7.25 indicates a change in the big picture. First target: $9.

DOLLARAMA (DOL.TO)

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 capex marry well technically with the stock pointing to a first target of $175.

PAST PICKS: SEPT. 21, 2017

TD BANK (TD.TO)

• Then: $69.01
• Now: $75.72      
• Return: 10%
• Total return: 13%

ISHARES NASDAQ BIOTECHNOLOGY ETF (IBB.O)
3-for-1 stock split, December 2017.

• Then: $331.27
• Now: $111.24
• Return: 1%
• Total return: 1%

ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO)

• Then: $12.64
• Now: $14.62
• Return: 16%
• Total return: 16%

Total return average: 10%