Feb 21, 2020

Ian Fung's Top Picks: Feb. 21, 2020

BNN Bloomberg

Ian Fung , BNN Bloomberg

Ian Fung, vice-president and portfolio manager at Davis Rea
Focus: North American large caps

MARKET OUTLOOK

The global economy is poised to improve this year, with Canada and the U.S. following it. Global manufacturing activity began to recover in the second half of 2019, helped by lower interest rates, especially in the U.S. However, the coronavirus has since put a damper on growth and estimates are being revised downwards.

China continues to face the biggest risk of economic disruption from the virus, with impacts to global supply chains, manufacturing, demand for goods and consumer sentiment, which will affect the rest of the global economy. It remains to be seen how quickly conditions can recover, but the U.S. generally remains on a steady footing for now. If conditions continue to deteriorate and we see a longer path to economic recovery than is currently predicted by consensus, we could see additional stimulus from central banks.

Equities are expected to outperform bonds, with the economically-sensitive areas of the stock market such as industrials and technology leading the way. Banks should also do well, with the outlook for U.S. banks looking particularly good.

Given the uncertain impact of the coronavirus on the economy, we continue to favour higher-quality companies and are keeping some powder dry for opportunities should the market stumble.

TOP PICKS

SYNOPSYS (SNPS NYSE)

Synopsys is a leader in electronic design automation solutions for the global electronics market. It provides tools and intellectual property to assist in the design of semiconductors primarily through a subscription model. These include design software, consulting services and solutions to check code for errors. Semiconductor designs have been increasing in complexity as demand for computing power continues to grow. Synopsys provides the foundation for companies to design more complicated chips, also integrating design between hardware and software. Almost 90 per cent of the company’s revenue is recurring and it’s continuing to grow its product offering through investments into security, testing and design intellectual property. Recently, Synopsys reported strong earnings growth, with bookings growth of 30 per cent in their fastest-growing segment, which should set the stage for another strong year.

HOME DEPOT (HD NYSE)

Home Depot is the world’s largest home improvement retailer. It’s a direct beneficiary of consumer strength and the housing market in North America. The company has increasingly been focusing on e-commerce and professional sales and has been investing to improve operational efficiencies and customer experience. These include investments in distribution centres, their fulfillment network, supply chain improvements and online storefront. Home Depot is now able to deliver products to 95 per cent of the U.S. population within two days and over 50 per cent within one day. Free cash flow generation remains strong and supports both reinvestments into the business and shareholder return through a modest dividend (currently yielding 2.2 per cent) and share repurchases.

STRYKER (SYK NYSE)

Stryker is one of the world's leading medical technology companies, active in more than 100 countries around the world. It has products and services in orthopedics, medical and surgical and neurotechnology and spine that help improve patient and hospital outcomes. Stryker continues to lead in knee surgery with its Mako robot, which has been steadily gaining share in the market as it drives better outcomes for patients and greater efficiency for surgeons. The rest of their product portfolio is performing well, with recent acquisitions (K2M in spine and Wright Medical in upper extremities) bolstering the portfolio. The company has consistently delivered accelerating organic sales growth over the last seven years, resulting in robust cash flow generation. We expect Stryker to deliver mid to high single-digit organic growth going forward while delivering operating margin improvements, given the quality of their product portfolio and cost transformation efforts.