Hap Sneddon, chief portfolio manager and founder of Castlemoore
Focus: Technical analysis
MARKET OUTLOOK
“Sell in May and go away” is an adage that doesn’t really add up. Sure, the indexes can tread water or decline from May through to October, but there are many areas that perform quite well against the averages. Typically, defensive areas such as health care, consumer staples, utilities and REITs are strong during this period, but also many pro-growth or cyclical industries such as energy, technology, agriculture and materials also show historical strength.
Fundamentally, the economic data in the U.S. is quite decent, the U.S. Fed has removed the upward rate bias for now on the level of the discount rate and earnings expectations are rising. Weakness now is more political than anything according to the price and data trends. An allocation today favours pro-growth with a dash of undervalued defensives, as our top picks show.
TOP PICKS
ISHARES NASDAQ BIOTECHNOLOGY ETF (IBB.OQ)
Healthcare has been a hot potato at times over the last five years, and again most recently now as the U.S. presidential race heats ups and candidates discuss universal coverage for all and drug pricing regulation. While such discussions are important and necessary, biotech is at the leading edge of the sector and will not go away regardless of the politics. Many companies are exceptionally undervalued, presenting an excellent risk-to-reward and the sector is just at the head of its period of strong seasonality.
ENERPLUS (ERF.TO)
The company trades at an enterprise value to debt-adjusted cash flow of 4.2 times compared to peers 5.9 times and below its own average of 5.6 times. Recent earnings also noted an increase to its reserves, a closing of the differential with WTI from several regions and a sustainable share buyback program (unique in the space due to cash flow). Its period of seasonal strength runs from late April to August and coincides this year with a good set-up.
FRANCO-NEVADA (FNV.TO)
Franco-Nevada is a premium gold company due to its portfolio diversification and excellent balance sheet, both of which allow it growth opportunities inaccessible to most peers. With the U.S. dollar rolling over on a multi-year basis and the period of seasonal strength in gold upon us, Franco-Nevada at offers an excellent risk-to-reward at these prices. According to equityclock.com, the company’s historical seasonal return strongly outperforms the relative buy-and-hold performance of the stock market over the past 10 years by an average of 8.76 per cent yearly.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| IBB | Y | Y | Y |
| ERF | N | N | N |
| FNV | N | N | N |
PAST PICKS: FEB. 4, 2019
CP RAIL (CP.TO)
- Then: $267.82
- Now: $298.86
- Return: 12%
- Total return: 12%
PROGRESSIVE CORP (PGR.N)
- Then: $66.03
- Now: $74.24
- Return: 12%
- Total return: 13%
ISHARES CORE MSCI EMERGING MARKETS ETF (XEC.TO)
- Then: $26.11
- Now: $27.10
- Return: 4%
- Total return: 4%
Total return average: 10%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CP | N | N | Y |
| PGR | N | N | Y |
| XEC | Y | Y | Y |
WEBSITE: castlemoore.com
TWITTER: @Hap_Sneddon
COMPANY TWITTER: @CastleMoore
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