Full episode: Market Call Tonight for Tuesday, February 18, 2020
Michael Decter, CEO and chief investment officer at LDIC
Focus: Canadian large caps
Most equity markets around the world were up big in 2019. The S&P 500 had its best year since 2013 and equity markets have continued their upward march into 2020. Industry analysts have started to cut their Q1 earnings estimates to reflect the possible consequences of the coronavirus. However, they’re offsetting those cuts by boosting their estimates for the second half of 2020. Other factors supporting new highs are low rates, strong consumer spending, the U.S.-China deal and accommodative central banks.
With U.S., German and Japanese yields at very low levels, the market is telling us there’s no likely scenario in which economic growth will be high in 2020. The biggest impact from the coronavirus has been on interest rates, with the U.S. 10-year yield falling from 1.9 to 1.6 per cent. This decline has been a tailwind to equity valuations. On the rate front, we don’t expect further cuts in Canada or the U.S. nor rate increases until at least early 2021.
The root of 2019’s volatility was the summer growth scare highlighted by an inverted yield curve. We expect volatility in 2020 will primarily come from the U.S. presidential race. We don’t expect drug price reform before the election.
Our outlook for 2020 remains optimistic. Stable inflation, consumer spending, rates and earnings growth are all supportive of the market. However, we believe micro will be more important than macro in 2020. We are already witnessing this and expect to see more of this trend.
JPMORGAN (JPM NYSE)
JPMorgan is a well-diversified financial institution, which reduces the volatility of its earnings. The bank operates in consumer and commercial banking, investment banking and asset management. It spends an industry-leading $11 billion on technology investments, allowing it to lower costs and gain market share. JPMorgan’s strategy is sustained investments in the technology platform to drive share gain and maintain a best-in-class return on equity.
The bank has decided to reinvest the cost saves as it keeps seeing opportunities to push the technology forward. It’s getting some credit for this through its higher 12-times multiple (on 2020 earnings per share). We like JPMorgan because of its stable loan growth, range-bound interest rates and there’s no U.S. recession in sight.
STRYKER (SYK NYSE)
Smart strategy, disciplined execution, and outstanding leadership have made Stryker the steadiest player in medtech. Management continues to have confidence in 70 to 80 per cent free cash flow conversion in 2019.
Organic revenue growth was 8.1 per cent in 2019, marking the seventh consecutive year of organic acceleration. 2020 may be the year where organic growth begins to level off or decelerate, but regardless, the company is on-track for another strong year.
The global Mako Robotic-Arm Assisted technology for knee and hip replacement is a growth area for Stryker. The installed base now stands at approximately 860 robots, on pace to pass the 1,000 threshold in 2020.
VISA (V NYSE)
The foundation of our bullish outlook for Visa is our high conviction view on its strong, sustained secular growth opportunity. We forecast global card payment volumes (outside of China) will grow at a 9 to 10 per cent compounded annual growth rate, as card penetration of purchases grows from 45 to 52 per cent from 2019 to 2023.
Visa is not a financial institution: It does not issue cards, extend credit or collect fees. Visa is a technology company that owns data centres, underwater cables globally and a trusted brand. The product is a reliable processing system with almost no downtime. The stock is not correlated with financials and has a 60 per cent correlation with the technology sector.
Visa noted that Visa Direct is growing two times faster than what Visa Debit had grown at a similar point in its lifecycle. Visa Direct supports 160 currencies in over 200 countries.
PAST PICKS: OCT. 2, 2019
BOYD GROUP SERVICES (BYD TSX)
- Then: $172.32
- Now: $226.73
- Return: 32%
- Total return: 32%
NETFLIX (NFLX NASD)
- Then: $268.03
- Now: $387.78
- Return: 45%
- Total return: 45%
MEDTRONIC (MDT NYSE)
- Then: $105.94
- Now: $112.66
- Return: 6%
- Total return: 7%
Total return average: 28%
LDIC Healthcare Special Opportunities Fund
Performance as of: Dec. 31, 2019
- 1 month: 2.43% fund, 1.40% index
- 1 year: 17.55% fund, 18.4% index
- 3 years: 15.41% fund, 14.11% index
INDEX: MSCI World Health Care Index.
Returns are based on reinvested dividends, net of fees and annualized.