Nov 12, 2018

Hap Sneddon's Top Picks: Nov. 12, 2018

BNN Bloomberg

Hap Sneddon , BNN Bloomberg

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

MARKET OUTLOOK

Seasonally speaking, the end of October ushers in the strongest part of the investment year. This annual investment pattern, which lasts right through to late spring, is set up to be very strong this year (if we get going) due to a higher-than-normal period of negativity that has preceded it.

This year, all non-U.S. markets and particularly the economically-sensitive TSX have been under heavy pressure since spring from global trade frictions, politics and rising interest rates. In a mid-term U.S. election year, markets typically go flat or down from June until the election. This year, the U.S. actually rallied throughout the period, acting like a vortex for most global investment inflows. Now, however, even the U.S. stock market has begun to feel the weight of the negative investment mood, with its trading relationship with China the biggest driver. This said, the recent drop in the U.S. markets puts them now back on the path of its historical trend in a mid-term election year – it just got ahead of itself. Since 1946, returns after a mid-term election have been positive three, six and 12 months out 100 per cent of the time.

With many indicators at extremes, this bullish case will be borne out by a meaningful decline in the U.S. dollar. The single biggest reason for the extraordinary strength this year in the greenback and the subsequent negative impact on everything non-U.S. and commodities in general is the repatriation of a huge amount of offshore American corporate profits due to tax changes. Yes, the dollar becomes a flight-to-safety destination and the Fed is raising rates, but these are temporary or can be discounted. The convergence of all three, however, has distorted the strength of the dollar, setting up a broad-based rally.

TOP PICKS

TECK RESOURCES (TECKb.TO)
Last bought on April 18, 2018 at $33.43.

At current levels, Teck offers a good risk/reward, with the technicals and fundamentals implying a stand here at this price. At the end of the quarter, the company had $1.5 billion in cash, was trading at a discounted 3.8 times enterprise value to 2019 estimates, had a cash flow at 5.7 times compared to its global peers and a free cash flow yield of 15 per cent for 2019. It also had a good copper growth profile and a reduction in costs of 5 per cent over the next year. Any positive developments in the U.S.-China trade dispute will reignite low supply, One Belt One Road and global infrastructure tailwinds.

MCDONALD’S (MCD.N)
Last bought on April 11, 2018 at $163.88.

McDonald's, which embarked several years ago on a transformation, is well on its way to an updated model. Having refranchised 4,000 units by the end of 2017, it’s making headway on saving $500 million in net annual selling, general and administrative expense (SG&A) reductions. It’s keeping its brand in the upper tier of quick-service restaurants, with the company’s average unit volume at US$2.5 million, cash-on-cash returns for new restaurants exceeding 25 per cent and a dividend yield of more than 2.5 per cent. The stock is a leader after surmounting the highs earlier in the year, unlike the market itself.

UNITEDHEALTH GROUP (UNH.N)
Last bought on March 29, 2018 at $220.48.

UnitedHealth operates health benefits and services through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. With expected future growth rates in the 13 to 16 per cent range, the company is acting more like a tech growth story. Recent earnings showed an increase in EPS, margins and enrolment growth beyond company and market expectations. The recent Democrat in the House also raises expectations that Medicaid will be expanded in several states. Health care in general is in a secular bull market; UnitedHealth is a front runner in it.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
TECKb	Y	Y	Y
MCD	N	N	Y
UNH	N	N	Y

PAST PICKS: DEC. 4, 2017

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

We continue to hold XBM and individual base metal names. The sector has been in a very wide basing pattern that has recently held at October lows. The market is holding here for a positive outcome to the U.S.-China trade relations.

Then: $12.84
Now: $11.44
Return: -11%
Total return: -9%

KELT EXPLORATION (KEL.TO)

Kelt Exploration was sold May 28 for a profit of 18.4 per cent. It has recently come on our radar after recent positive earnings and a big price drop.

Then: $7.24
Now: $5.03
Return: -31%
Total return: -31%

BANK OF AMERICA (BAC.N)

We sold Bank of America for small loss, preferring to shift some of our allocation in the financials to the credit card companies: American Express, Mastercard and Visa.

Then: $29.06
Now: $27.75
Return: -5%
Total return: -3%

Total return average: -14%