Sep 28, 2016

Hap Sneddon's Top Picks: September 28, 2016

BNN Bloomberg

Hap Sneddon , BNN

Hap Sneddon, Founder and Portfolio Manager, CastleMoore

Focus: Technical analysis and macro portfolio strategy
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Market Outlook

With the September Fed meeting behind us and the U.S. presidential election ahead, we are in between days it seems, like waiting for Godot, waiting for a catalyst to change the investment landscape be it political, economic or otherwise. In the meantime, investors are exposed to many different crosswinds that muddle investment decisions.

The corporate earnings picture has been declining for five straight quarters. Q3 for the S&P 500 is expected to decline -2.3 per cent, making it six declines in a row, yet 2017 earnings expectations show an increase of 14.8 per cent year over year. On the GDP front, Q3 consensus is at 2.8 per cent and Q4 at 2.4 per cent. These follow a 1.1 per cent number for both Q1 and Q2. Consumer Confidence in the U.S. surprised to the upside yesterday, however the manufacturing PMI printed 49.4 in August, down from 52.6 in July, while service rose to 51.9 in September from 51 in August to reach a five-month high. Wages and housing — the main drivers of inflation — have been modestly better, but capital investment is declining or flat, suggesting the improvement in wages is not reliable or sustainable. And last, we have a sanguine Fed, or at least the appearance that they are optimistic.

When we look outside of North America we see that Europe has lots of challenges, the most pointed being nagging deflation and the banking sector, with the bureaucrats now zeroed in on the states of Deutsche Bank and Monte Paschi Bank. We may well certainly hear more about these two in the coming days and months. Japan can't imagine growth, let alone conjure it nor convince the markets that it’s convinced of its own plans. China is somewhat of a mystery but with rumours of debt piling up higher than the known print of 250 per cent of GDP (whisper is 300 per cent) it seems like it’s a mysterious time bomb.

Crosswinds aside, markets are not in too bad shape though slightly extended at present, and continue to reflect a positive bias toward a portfolio that is convex, or one that displays balanced risk, especially between pro-growth and pro-cyclical themes.

Top Picks

Extendicare (EXE.TO)
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.

Aecon (ARE.TO)
Aecon, which operates in four areas (infrastructure, energy, mining and concessions), is representative of “convexity” in a single stock by both its pro-growth and defensive attributes. Increasing revenue and operating income, a growing order backlog, a company-raised outlook and dividend increase of 15 per cent when combined with the technical picture, paints a long-term bullish picture and a $25.00 target.

Baxter (BAX.N)
Baxter, which operates in two healthcare segments (hospital products and renal), is part of a secular bull market in the sector that began in 2012. Though there are some near-term challenges following the spin-off of Baxalta, growth should be strong with management’s focus on profitability. Competitive advantages in the dialysis and hospital markets should allow for margin expansion gains over the coming years. Combined with the bullish technical picture, we arrive at a target US$65.00.