Matt Kacur, President, FSA Financial Science and Art 
FOCUS: North American Equities
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MARKET OUTLOOK
The S&P 500 has been up 19 of the last 20 months aided by low interest rates. Global output is projected to grow at a healthy 3.5 per cent and since the U.S. Federal Reserve is reluctant to raise interest rates in a substantial way, the market could continue to run higher.  However, stocks are not cheap. A key metric for us is the premium to invested capital which on average is now 63 per cent which is the highest it has been in six years. By comparison, six years ago the premium to invested capital was 43 per cent. We think high valuations make the market vulnerable to a negative catalyst. For instance, if the federal reserve were to change their stance in interest rates and telegraph rising rates the market could go down substantially. Interest rate hikes are an obvious negative catalyst but there could be a less obvious negative catalyst lurking. In conclusion, the market is healthy but don’t be too complacent.

TOP PICKS

ALIMENTATION COUCHE-TARD (ATDb.TO)
The Company owns 9,471 convenience stores throughout North America, including 8,129 stores offering road transportation fuel in all 10 Canadian provinces and 42 U.S. States. 2,754 stores, comprising a broad retail network across Scandinavia, Ireland, the Baltics, Poland and Russia. More than 1,700 stores operated by independent operators under the Circle K banner in 13 other countries or regions worldwide which brings the number of sites in Couche-Tard’s network to over 15,000.

BROADCOM (AVGO.O)
“Connecting Everything” is part of their registered trademark and it’s appropriate. Think cloud, broad band, big data and automation. They have major products in Wireline, Wireless, Enterprise Storage and Industrial Automation. Another term they used in their investor presentation is “Heritage of Technology” because they have bought business and made mergers with technology greats like Hewlett Packard, Agilent, AT&T Bell Labs, Lucent, LSI Logic and Avago. Fundamentally they are earning a 36 per cent return on capital and undervalued in our cash flow valuation model.

GENERAC (GNRC.N)
Generac Holdings Inc. designs, manufactures, and markets power generation equipment and other engine powered products for the residential, light commercial, industrial, oil and gas, and construction markets in the United States, Canada, and internationally.

We have been following Generac for a long time and just started recommending the stock this summer. Return on capital has been consistently above 19% for 10 years. Shares fell from a high of US$60 in 2014 to US$30 in mid 2016. But since 2016, we saw improving fundamentals and the stock still had not moved much. In July 2017, the stock was only about US$35 and we felt it was the right time to buy the stock. In addition to improving fundamentals, the company got a further boost during hurricane season. The hurricanes are not a good enough reason to buy the stock but it did bring investors’ attention to the stock.

PAST PICKS: July 24, 2017

HUDBAY MINERALS (HBM.TO)

• Then: $8.67
• Now: $9.93
• Return: 14.53%
• Total return: 14.63%

OCLARO (OCLR.O)

• Then: $10.11
• Now: $8.43
• Return: -16.56%
• Total return: -16.56%

VISA (V.N)

• Then: $100.37
• Now: $108.67
• Return: 8.26%
• Total return: 8.44%

TOTAL AVERAGE RETURN: 2.17%