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

MARKET OUTLOOK

Equity markets in North America continue to chug along and confound those who call the markets expensive. While market averages do seem mildly rich from a historical point of view and are discounting a no recession scenario for next year (which we agree with), there are many strong companies trading at very reasonable valuations considering their mid- to long-term prospects. Investors would be well served to look beneath the headlines and read the results of individual businesses and consider why they invest, what returns are needed and over what time frames for a given level of risk they are prepared to bear. Investors willing to not speculate on headline outcomes and focus on quality businesses should continue to enjoy reasonable returns over time.

TOP PICKS

MCDONALD’S (MCD:UN)

McDonald’s is the preeminent quick-service restaurant company in the world. The company has grown earnings and dividends over the past five years at  a nine-per-cent growth rate. There is little reason to expect the company will not be able to replicate this experience. Its valuation is within its historical ranges and thus nine per cent growth over a five-year period is a reasonable expectation. This combined with a 2.5 per cent dividend yield that should grow at a healthy rate should satisfy investors looking for quality and certainty over reasonable timeframes.

FEDEX (FDX:UN)

FedEx is the most advanced global package and freight company in the world. It has increased its earnings (CAGR) at 13 per cent and its dividend at a 30-per-cent rate over the past five years. The company has made incredible investments into European operations and there is disappointment at the pace of progress, but little reason to believe that its history of excellent logistical skills will not solve the short-term integration challenges. Investors worried about trade, competition and integration should be comforted by the fact the stock has fallen 40 per cent from its highs and trades at a pessimistic 12 times next year’s earnings.

BROOKFIELD INFRASTRUCTURE PARTNERS (BIP-U:CT)

This is a globally diversified and strongly financed infrastructure company with a strong track record of increasing distributions to owners. The company has grown distributions at a 14 per cent CAGR the past five years and it will likely repeat a similar outcome over the next five years. Investors looking for stability and yield will be well served with Brookfield Infrastructure’s four per cent yield over time.

PAST PICKS: DEC. 13, 2018

GOLDMAN SACHS (GS:UN)

• Then: $175.92
• Now: $220.28
• Return: 25%
• Total return: 27%

STANLEY BLACK & DECKER (SWK:UN)

• Then: $117.90
• Now: $157.28
• Return: 33%
• Total return: 35%

JPMORGAN (JPM:UN)

• Then: $101.12
• Now: $130.79
• Return: 29%
• Total return: 33%

Total return average: 32%

WEBSITE: davisrea.com