John Petrides, managing director and portfolio manager at Point View Wealth Management

Focus: U.S. equities
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MARKET OUTLOOK
Stocks continue to grind higher on the back of better U.S. economic data, quarterly earnings resuming growth, and President Trump’s aggressive policy actions in the first few weeks of office, which will turn “hopes” of tax reform, deregulation and infrastructure spending into reality. The Dow Jones index crossed the 20K mark, a symbolic gesture for investors. The jobs data continues to be strong. The Fed language in the short term has been dovish, but that will be temporary assuming the pace of job and wage growth continues, and volatility in the domestic and global stock markets remains calm. However, the strength of the U.S. dollar will pose a headwind for companies, particularly stocks in the industrials sector, which has rallied hard on the back of potential fiscal stimulus. There is no denial the need for further investment in infrastructure; the question is the timing, and who will be the beneficiaries. On the other hand, the selloff in healthcare is a great buying opportunity. Headline risk and fears of controlled drug pricing has dampened the sector (the only negative performing sector in the S&P 500 in 2016). However, the long-term fundamentals are still intact: an aging and growing global population. Healthcare companies in general have strong balance sheets and have been good stewards of capital for shareholders. We think the sector offers compelling long-term value. For the long-term investor, we continue to believe in being overweight equities, underweight bonds, and being fully invested with almost no cash.

TOP PICKS

MATTEL (MAT.O) – $8.8-billion market cap. Stock sold off recently and has been down 18 per cent over the past three months (mostly following the latest earnings call). Have been working through a turnaround for 18 months now. Embracing 3D printing to make toys. Six per cent dividend yield. Trading at 15x earnings. New “Cars” movie will help. Owner of Barbie, Fisher Price and American Girl. Barbie turnaround in place, nice rebound this quarter. Margins were pressured by FX/strong U.S. dollar. Paid up for shelf space, which hurt margins.

AMDOCS (DOX.O) – Provider of billing and back-office systems for telecom and cable providers. 14.5x P/E. 1.32 per cent dividend yield. $9 billion market cap. Grown the dividend 13 per cent annually over the past three years. Bought back four per cent of shares outstanding annually over the past 10 years. Five per cent free cash flow yield. $770 million in cash, no debt on the balance sheet (10 per cent of company in cash). Seventy to 80 per cent of sales are recurring. Top 10 customers equals 70 per cent of sales. Current backlog is $3.18 billion. Revenue is $3.7 billion.

HANESBRANDS (HBI.N) – $7.3 billion market cap. Rough quarter. Company had good performance, just not what the market expected. Stock trading at 8x earnings. Done a great job executing “innovate to elevate strategy.” Has become good capital allocators and have been able to reinvent a commodity category: tagless; X temp. Made solid strategic acquisitions like Maiden Form. Tripled dividend since 2013; 2.3 per cent dividend yield. Cotton costs remain low at $0.70/ton. Weaker foot traffic at malls is hurting. Mass merchant and department stores equals 65 per cent of sales. International is growing double-digits, and is 30 per cent of sales.
 

PAST PICKS: NOVEMBER 29, 2016

BAKER HUGHES (BHI.N) – Up 1.7 per cent since November 29, 2016. Thesis is still intact. I would continue to hold. Trump has come out strong by issuing an executive order to open the Keystone pipeline. Good sign for the entire industry. BHI is merging with GE oil services. The combined entity will be the second largest behind Schlumberger in terms of revenue in the oil and gas services industry. If the deal is blocked, or does not happen, BHI will receive a $1.7 billion breakup fee. Remember, Haliburton tried to buy BHI. The deal fell apart. BHI received $3.5 billion in compensation from a breakup fee. They bought back stock and paid down debt. So if the deal falls through, then BHI remains a top-four player in the space but with a very strong balance sheet. If the deal goes through, then shareholders own the second-largest services company in the space.

• Then: $60.48
• Now: $61.93
• Return: +2.41%
• TR: +2.69%

NESTLE (NSRGY.PK) – Up 7.7 per cent since November 29, 2016. Thesis is still intact. I would continue to hold. Valuation is still attractive. Stock has not recovered post Brexit. Nestle owns a 23- per-cent stake in L’Oreal that they can always monetize. Very strong brand portfolio. 3.2 per cent dividend yield is attractive. 18x P/E a premium to the market, but lower than normal.

• Then: $67.61
• Now: $73.72
• Return: +9.02%
• TR: +9.02%

ALLERGAN (AGN.N) – Up 21 per cent since November 29, 2016. Thesis is still intact. I would continue to hold. Healthcare is attractive. AGN has a strong portfolio and pipeline. Balance sheet is rock solid post the sale of its generics business to TEVA for $40 billion. Company has bought back $10 billion in stock, started a dividend, paid down debt, and made strategic acquisitions to bolster its pipeline. Still, this stock is very undervalued.

• Then: $192.64
• Now: $248.27
• Return: +28.87%
• TR: +28.87%

TOTAL RETURN AVERAGE: +13.52%