John Burke, president of Burke Financial Strategies
FOCUS: U.S. equities
_______________________________________________________________

MARKET OUTLOOK

The market is most interested in earnings, not government policies. Earnings have been good. Expectations for this quarter, unlike the last two, are for earnings growth below five per cent. Similar to recent quarters, however, we think that expectations have been knocked down a little too much and that earnings growth will be in the high single digits, and even that includes somewhat of an impact from hurricanes Irma and Maria. Companies continue to benefit from strong global growth as all major world economies are now moving forward. The global nature of the large companies cannot be underestimated.

We do, however, worry about market corrections or even the timing of the next bear market. We think that the lack of corporate tax reform in the U.S. will negatively impact stocks because of the expectation of some help to earnings from tax cuts. We also worry about ANYTHING that would curtail global trade, which would in turn hurt global growth. Absent these two risks and absent war breaking out, we think the market will continue to move up.

TOP PICKS

CISCO SYSTEMS (CSCO.O)
It is hard to find cheap technology stocks. Most of the names we follow are up 20 to 45 per cent. Cisco has kept pace with the broad market this year, up almost 15 per cent, but is cheap compared to the sector. We like the dividend at 3.4 per cent, but we especially like the free cash flow yield of 8.1 per cent. The company manufactures and sells network equipment and network storage systems. Cisco is the largest networking company in the world and with sales all over the world. Earnings were stagnant from 2013 until this year though at a high level of profitability. Our analysts expect earnings to start picking up.

LEGGETT & PLATT (LEG.N)
While you may have never heard of Leggett, you are likely either sitting on or standing on something they manufactured. Leggett makes carpet padding and components for furniture. They sell their furniture products to final manufacturers. Like Cisco, the company is very profitable with a free cash flow yield of 6.25 per cent, as compared to the S&P 500 average of just over 4 per cent. The stock has lagged the market this year and last.  Part of that is the Amazon or e-commerce effect. With e-commerce, the world needs less inventory as customers are not going to a physical place where inventory is needed. As such, retail companies have recorded a number of quarters of weak sales. In fact, retail is the only cheap sector we can find. But we like the companies that are making products that will be bought either through e-commerce or in a bricks and mortar store, and Leggett is one of those. The company has a long history of consistent performance.

NEWELL BRANDS (NWL.N)
Newell is another cheap name in the retail space. We like to point out that during the last few years while the market has marched to new highs, there have consistently been opportunities of cheapness. Last year it was health care stocks. Financial stocks had been cheap for years until strong performance last year. I have appeared on BNN pointing out these opportunities. Retail is the current cheap sector. But you don’t want stocks that are cheap for good reason. Macy’s and J.C. Penney are being badly hurt by Amazon. Newell is another name of a product manufacturer that can sell in the e-commerce space. Further, Newell was badly hurt by hurricane Irma with supply disruptions occurring just before the holiday season. Irma obviously does not reflect on bad management and we think the huge underperformance of this stock represents an opportunity for patient investors.

PAST PICKS: AUGUST 22, 2016

AMERIPRISE FINANCIAL (AMP.N)

• Then: $97.01
• Now: $162.80
• Return: 67.82%
• Total return: 72.36%

KEYCORP (KEY.N)

• Then: $12.23
• Now: $18.52
• Return: 51.43%
• Total return: 54.49%

PRINCIPAL FINANCIAL GROUP (PFG.N)

• Then: $47.12
• Now: $68.20
• Return: 44.74%
• Total return: 50.26%

TOTAL RETURN AVERAGE: 59.04%