Aug 24, 2016

Michael Sprung's Top Picks: August 24, 2016

BNN Bloomberg

Michael Sprung , BNN

Michael Sprung, President, Sprung Investment Management

FOCUS: Canadian Large Caps

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MARKET OUTLOOK:

North American markets have continued their upward trajectory despite a growing list of negative geopolitical and business risks, particularly those stemming from the surprising vote in the U.K. to Brexit. At the same time, the global bond markets appear to be signaling an expected decline in economic activity. Governments outside of North America continue to attempt to stimulate economies through quantitative easing and proposed infrastructure spending. Over US$13 Trillion of sovereign debt is now at negative interest rates and the total continues to grow.

Politicians in North America and Europe are exploiting the public's unrest through fear-mongering on the issues of globalization and free trade as was most evident in the Brexit vote and continues in the U.S. presidential race. As the U.S. election draws nearer, more noise from the political pundits will distract attention from the longer term fundamentals.

After a number of years of expansion fueled by debt, we could be entering a period of deleveraging that will stall global economic growth for a period and potentially cause markets to decline and volatility to increase. Investors should concentrate on the longer term issues and be prepared to take advantage of current circumstances to invest in well financed, well managed companies.

Top Picks:

HudBay Minerals (HBM.TO)

HudBay Minerals is one of Canada's leading producers of zinc, copper and precious metals with operations in Canada, Peru and the U.S. While the share price has appreciated significantly in the past few months, positive developments are still on the horizon that will enhance the underlying value of the company. Delayed shipments impaired sales in the latest quarter that should be made up going forward. Further development in Peru is a possibility. Improvements in Manitoba at Lalor and Reed are also noted.

Manulife (MFC.TO)

Manulife is a leading Canadian-based financial services group with operations in Asia, Canada and the United States. Over the past five years, the company has made tremendous strides in de-risking the balance sheet and improving profitability through increasing wealth management operations as well as redirecting the mix of products sold. Recent quarter results disappointed as negative policyholder experience in the firm's U.S. Long Term Care (LTC) Business overshadowed positive developments elsewhere. Excluding the LTC hit, results from the U.S. divisions were in line with expectations. Canada and Asia reported favourable trends in earnings. The market reacted negatively to these results. MFC has the strongest capital base of the insurers. Going forward, we expect the problems within LTC will be dealt with and at current levels, the shares represent good value and yield 4.2 per cent.

Suncor Energy (SU.TO)

Suncor is Canada's largest integrated oil and gas company. Suncor has a strong production base with quality long-term assets, a strong balance sheet, and an integrated business model smoothing to some extent the cash flow from the various business segments. The latest quarter exhibited mixed results, partially as a result of the wildfires in Northern Alberta that affected both production and operating expenses. We anticipate that production will increase both organically and perhaps through acquisition. Suncor has a strong balance sheet to support and expand operations. At current levels, the stock yields 3.2 per cent.