John Kim, portfolio manager at Aventine Asset Management
Focus: North American equities

MARKET OUTLOOK

There are still sign the U.S. and global economies are slowing down with the possibility of a recession growing. Economic data around the world continue to deteriorate, European PMI for August is the worst in seven years and German data is the worst in a decade. Trade tensions between U.S. and China are still very volatile, with the latest news being the Chinese delegation headed home early after negotiations in the U.S.

The Fed’s latest policy announcement left unclear whether we will see more rate cuts or not and markets are seesawing. Plus, new geopolitical tensions with bombing of oil facility in Saudi Arabia are putting back the risk premium in oil markets, with many observers speculating that rising oil and gasoline prices will trigger a recession in the U.S.

I still believe we are in the late stages of this bull market. Even after the recent market plunge, valuations are at the high end of the historic range.

TOP PICKS

FEDEX (FDX:UN)

Most recent purchase was on Aug. 7, 2019 at $157.85.

• FedEX missed FY2020 Q1 estimates and gave materially lower guidance for rest of year. The stock is off 15 per cent since reporting.
• Valuation is still compelling. It’s trading at 11.5 times FY2020 estimates. Enterprise value to EBITDA is at a 10-year average.
• There’s near-term anxiety over whether the lower guidance is due to company-specific or industrywide issues. UPS says it’s not seeing a slowdown.
• FedEx is continuing its airplane fleet modernization to reduce future operating costs. It’s also moving to seven-day delivery to better serve their e-commerce customers. This is putting pressure on margins.

INTEL (INTC:UW)
Most recent purchase was on May 31, 2019 at $44.39.

• Intel is currently trading at a reasonable valuation. It has a price-to-earnings of 11.5-times FY2020 estimates and price-to-free cash flow of 17-times FY2020 estimates.
• Intel has an attractive dividend yield of 2.5 per cent. The dividend has grown 7 per cent yearly over the past 10 years.
• The company still has a very defensible moat. It’s the largest semiconductor manufacturer in the world and has near-dominance in the PC and server chip markets.
• Continued growth in data centres provides growth opportunities and investor nervousness is over.
• AMD starting to take market share in PC and server markets. Intel is also having problems getting to 7nm chips.
• Apple may use its own chips in MacBooks, replacing Intel.

CASH

Holding cash at this point in the cycle would be prudent. We believe that we are near the end of this bull run, and the likelihood of a market downturn is higher than another 10-per-cent run-up.

PAST PICKS: AUG. 9, 2019

CVS HEALTH (CVS:UN)

• Then: $59.29
• Now: $63.04
• Return: 6%
• Total return: 6%

FEDEX (FDX:UN)

• Then: $162.13
• Now: $145.04
• Return: -11%
• Total return: -10%

COMINAR REIT (CUF-U:CT)

• Then: $12.37
• Now: $13.08
• Return: 6%
• Total return: 6%

Total return average: 1%