John O'Connell, chairman and CEO of Davis Rea
Focus: North American large caps
MARKET OUTLOOK
China and the U.S. have gone to the next level of self-destructive behaviour, causing their citizens to pay more for each other’s respective goods and services. Because neither side can afford to behave in this manner for an extended period of time, this will pass. No one wins by causing their consumers and companies to lose.
China needs to sell things to America, and they also need to reform their system of economic protectionism and stop the theft of intellectual property. They no longer need to steal: They have an abundance of local talent and are quite capable of competing on the global stage. But change is difficult and old habits die hard.
Until now China has been the biggest loser in this tussle, but the U.S. consumer is about to feel pain. This new round of tariffs will apply to items that you buy in retail stores and China is by far the largest supplier to the U.S. of consumer goods. It will likely cost the average American family of four about $790 more a year to get dressed, walk, sit in a chair and watch TV. President Trump’s loyal fans and farmers in the Rust Belt are already getting smacked in the head from existing tariffs and now he’s hitting the whole country. Not a smart election move.
In China, Xi Jinping must make some decisions and figure a way to deliver the message to his aging population that their kids, who are expected to pay for their retirement, are losing their jobs and their stock market is in free fall.
China may be able to mess with Canada because we are small, but President Trump runs a bigger show and has the upper hand for the time being.
We’re in the late rounds of the battle. The effects on the stock market should wear off over time. Our portfolios have reasonably small economic exposure to this spat. The impact on the profits of the companies you own should be relatively muted. The headlines will be more exciting than the reality. The biggest impact will be on sentiment and valuations will bounce around with every bellicose tweet.
TOP PICKS
FEDEX (FDX.N)
FedEx is one of the world's largest courier and express transportation providers. It’s a play on global growth and a continued shift towards e-commerce. The company is one of the largest industrial shippers as well, and growth in the business-to-business market in addition to the business-to-consumer market provides a large revenue growth opportunity. FedEx continues to grow globally and invest in the infrastructure that’s required to optimize shipments for lighter packages and shorter delivery times and works through the integration of its European business. FedEx continues to generate free cash and also returns capital to shareholders through buybacks and a modest dividend.
RAYTHEON (RTN.N)
Best known for the Patriot Missile defense system, defence company Raytheon provides electronics, mission systems integrations and other capabilities in the areas of sensing, command and control, communications, 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 defense and intelligence, applying cutting-edge technology and re-investing in R&D. Raytheon has a large backlog of business, and consistently wins large contracts from countries and governments to provide both defensive 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 the defence budgets of countries. 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.
ACCENTURE (CAN.N)
Accenture is the world’s largest consulting firm and provides management and technology consulting services and solutions to clients globally. The company has been pivoting since 2014 to focus their consulting business on newer areas such as digital experience, data analytics, cybersecurity and cloud services, which now collectively comprise about 50 per cent of their revenues. They have achieved this through organic growth and also a combination of tuck-in acquisitions. It carries a pristine balance sheet with almost zero debt, and generates an abundance of free cash, which is allocated to acquisitions to grow the business and to shareholder return through a dividend (currently yielding 1.7 [per cent) and share repurchases. As the world focuses more on digital channels, Accenture is well positioned to benefit from the ongoing shift to cloud computing and focus on data-driven digital insights and experience.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FDX | Y | Y | Y |
| RTN | Y | Y | Y |
| ACN | Y | Y | Y |
PAST PICKS: MAY 31, 2018
GOLDMAN SACHS (GS.N)
- Then: $225.88
- Now: $194.97
- Return: -14%
- Total return: -13%
KEYERA (KEY.TO)
- Then: $36.35
- Now: $31.26
- Return: -14%
- Total return: -10%
BROOKFIELD INFRASTRUCTURE PARTNERS (BIP_u.TO)
- Then: $49.35
- Now: $56.14
- Return: 14%
- Total return: 18%
Total return average: -2%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| GS | Y | Y | Y |
| KEY | Y | Y | Y |
| BIP-U | Y | Y | Y |
FUND PROFILE
Davis Rea Equity Fund
Performance as of: April 30, 2019
- 1 month: 7.0% fund, 3.5% index
- 1 year: 2.1% fund, 8.7% index
- 3 years: 5.5% fund, 9.3% index
INDEX: 50% TSX60, 50% S&P 500.
Returns are based on reinvested dividends, net of fees and annualized.
TOP 5 HOLDINGS
- Gear Energy: 6.9%
- Kelt Exploration: 6.1%
- Cenovus Energy: 5.3%
- Stryker: 5.3%
- Brookfield Infrastructure Partners: 5.0%
WEBSITE: davisrea.com
TWITTER: @davisrealtd
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