Oct 28, 2016

Hap Sneddon's Top Picks: October 28, 2016

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
Short-term markets are in a corrective mode, which will play out through a varying combination of price and time. Fundamental hurdles include the U.S. presidential elections, China’s debt and property valuations (high), corporate earnings and U.S.-Russian relations in the Levant. All of these issues will have both a short- and long-term impact on markets, though the shape and scope are yet to be determined.

In the mid-term (the next year), markets are set up today for a potentially strong bullish move. One indicator, positioning, tells us that many investors are underinvested. Sentiment is also quite bearish. And last, just to name a few, a positive correlation exists between a Clinton victory and rising markets.

Longer term, there is both technical and fundamental challenges. Fundamentally, monetary policy has runs its course. Elected governments need to take up the mantle with fiscal initiatives, which take a long time to filter through, in order to address structural challenges (for example, infrastructure, pensions, healthcare and demographics). Two metrics, price to sales and asset prices to GDP, are at historically high levels. Technically, on the long term we have begun to roll over, though on this timeframe it’s like watching an ocean liner changing course — it takes time and it’s not obvious when it’s happening. Together, the fundamental and technical pictures imply a necessary rebalancing of risk is already underway.

In the meantime, investors seeking positive absolute returns and the flexibility to take advantage of investment opportunity over the next couple of years will benefit from prudent stop-loss management, a blend of sector momentum and stock picking, and a portfolio with strong “convexity” (a mix of risk and conflicting themes) attributes.

TOP PICKS

EXTENDICARE (EXE.TO) – Purchased September 27, 2016 at $ 9.18
Extendicare, a Canada-based company which owns and operates long-term care centers and provides publicly-funded home healthcare services, has seen some fundamental challenges over the last few years. However, the continuing U.S. divestitures, focusing on positive takeovers in Canada as well as home growth, make this a decent value play. The yield is rich but sustainable at 5.26 per cent as investors march towards the $13.25 target.

ALTAGAS (ALA.TO) – Purchased September 24, 2016 at $35.37
Altagas, a multi-faceted natural gas business, is a timely purchase on a technical basis. The recently positive Q3 results (above expectations), including a jump in discounted cash flow, strong portfolio growth opportunities and stable distribution, pushed the security above resistance. Based on this and a favourable risk-to-reward, we have recently taken an initial position with a $44.00 target.

MASTERCARD (MA.N) – Purchased September 27, 2016 at $104.0699
MasterCard is a utility for financial transactions. Its safe and reliable business model and robust brand not only presents a large barrier to entry, but the company is also excelling in data analytics which will eventually lead to ancillary revenue streams. While alternative digital payment methods may eat into the company’s share of the pie, the overall global pie is benefitting from secular global growth. This too is a timely purchase with tentative $132 target.