John O'Connell, chairman and CEO of Davis Rea
Focus: North American large caps

MARKET OUTLOOK

After a tumultuous end to the year, the market has stormed back in January. We thought the selloff was overdone at the time and the market has subsequently recovered some of the losses experienced in 2018. The market is adjusting to a new normal of slowing economic growth and earnings estimates are in the process of coming down as the reality of the macro environment shows up in company reports and forward guidance. Having said that, valuations are looking more attractive. As dovish commentary from the chairman of the U.S. Federal Reserve has provided a lift to markets, we think there’s an opportunity for the market to check back and give up some of the gains experienced. However, there are some issues that remain unsolved: A trade deal is yet to be finalized with China, and though temporarily fixed, the U.S. government is  still at risk of shutting down again. Despite the recent rally in markets, we remain somewhat cautious and are holding on to cash to redeploy if and when things retrace.

TOP PICKS

ALPHABET (GOOG.O)

As the undisputed leader in desktop web search, Alphabet continues to improve its foothold in mobile search and advertisements and has a number of other high-growth assets such as YouTube, Android and Google Play. On the mobile side, Alphabet has always been known as a software and advertising company, but they’ve recently entered the hardware arena with smart speakers and mobile phones. Google continues to impress in its advertising and search dominance and, with ongoing cost controls, we expect to see margin expansion contribute to the bottom line. We’re encouraged by the progress of some of their ancillary businesses, such as the cloud and the hardware unit. In the longer term, Alphabet also has its “other bets” segment, with businesses such as Waymo and Nest.  Alphabet is one of a very rare breed of companies that have shown earnings growth greater than 20 per cent for 35 consecutive quarters. Over the next year, we expect further progress on its autonomous car project, highlighting the revenue opportunity for the service. Additionally, its forays into healthcare through Verily show the company continues to use its highly-skilled workforce to explore new avenues for revenue growth.

STRYKER (SYK.N)

Stryker is one of the world's leading medical technology companies and is active in more than 100 countries around the world. It has a diverse array of innovative 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 their 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. They recently closed on the acquisition of K2M to bolster their spinal surgery portfolio, which is now growing rapidly. In neurotechnology, they released a product that has been proven to increase the treatment window in Ischemic Stroke that is gaining share rapidly. Stryker has fixed many of the supply and quality issues that came with the Sage acquisition last year and is returning to growth in those segments as well as their other surgical product categories. The company continues to grow faster than the market and maintains their historical capital allocation strategy of looking for opportunistic tuck-in acquisitions and returning capital to shareholders. They’ve been winning market share consistently at the expense of competitors and their global growth initiatives are beginning to pay off (for the first time last quarter, international organic growth was greater than that of the U.S.).

RAYTHEON (RTN.N)

Raytheon is a  defence company by definition, but applies technology to specialize in  defence, homeland security and other government markets around the world. Best known for the Patriot Missile  defence system, Raytheon provides electronics, mission systems integrations and other capabilities in the areas of sensing, command and control, communications and intelligence systems and mission support services. We believe that the diversity in business mix allows Raytheon to weather the ups and downs in  defence spending. The company puts a strong premium on innovating in  defence and intelligence, applying cutting-edge technology and consequently spending and investing in research and development and capital expenditures to do so.  Raytheon has a large backlog of business and consistently wins large contracts from governments to provide both  defence and offensive solutions. Increasingly, they’re earning a reputation as a leader in cyberdefence, which is an area we believe will see increasing allocations in  defence budgets. Raytheon consistently generates strong free cash flow, and returns a large portion of it to shareholders in the form of buybacks and a modest dividend.

PAST PICKS: APRIL 2, 2018

ACCENTURE (ACN.N)

• Then: $147.98
• Now: $156.55
• Return: 6%
• Total return: 8%

FACEBOOK (FB.O)

• Then: $155.39
• Now: $169.25
• Return: 9%
• Total return: 9%

ALPHABET (GOOGL.O)

• Then: $1,012.63
• Now: $1,141.42
• Return: 13%
• Total return: 13%

Total return average: 10%