Apr 24, 2019

Mike Newton's Top Picks: April 24, 2019

BNN Bloomberg

Mike Newton , BNN Bloomberg

Mike Newton, director of Wealth Management and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs

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MARKET OUTLOOK

That was a nerve shattering round trip. We’re now back to record levels in most markets around the world. In just six months, the Federal Reserve now says it’s on pause, bond yields have fallen, valuations are more respectable and trade talks between the U.S. and China have progressed. The big question one has to ask is: what could cause all of this to fade away?

To start, how about all-time highs? It will won’t be easy to break through these levels, as all-time highs are generally a source of very strong resistance. In addition, we need to see the U.S. small-cap stocks show leadership, which they haven’t done (yet); the Russell 2000 remains 9 per cent below its September high, giving some continued reason for caution. While the broader market has surpassed its prior high, the U.S.-centric small-cap and mid-cap areas are still lagging.

I’m sure I’m not alone in saying this, but that painful correction of last year was undone way too fast which is not the healthiest of signals. Although we remain near fully invested, I think the apparent “completion" of this round-trip looks to be a little premature. As such, we will continue to honour stop-losses in our portfolios in the event this positive environment turns. The next point of conquest for this bull market (and a gateway to further gains) will occur if we can push through and negate the overhang of macro worries.

As investors, we must get used to the idea that investing is never a game of perfects. We must always be open to the possibility that we will always experience unexpected and occasional mini-corrections that are not economy-wide disasters.

TOP PICKS

CHORUS AVIATION (CHR.TO)
Recent purchase at $7.89 on Feb. 26.

Chorus’ fixed-fee business model still provides significantly less risk than a conventional airline play. Exposure to non-controllable costs, including jet fuel prices, is limited as these are passed through accordingly to Air Canada. Additionally, controllable costs are no longer subjected to benchmarking of a group of peers and as such the level of profitability has less exposure to variability. Additional to all this, you also receive a healthy 6.58 per cent yield.

PAGERDUTY (PD.N)
Recent purchase at $38.40 on April 12.

PagerDuty offers a subscription service that allows businesses to improve the constant interplay between software developers and operators within their organization and lets them use real-time data to address incidents that occur. Not only is PagerDuty providing very real value to its customers, but it's doing so using the software-as-a-service model to create leverage and a widening competitive moat. The company has been doing this since 2009 but it only went public a few weeks ago, with shares jumping 60 per cent in their opening day of trading.

PagerDuty is used by developers at over 11,000 companies, including Slack, Box, Gap and Netflix. Revenue jumped 48 per cent last year to $117.8 million, though the company’s net loss widened to $40.7 million from $38.1 million a year earlier. The company believes it has a $25 billion total addressable market to tackle. It intends to remain committed to R&D to tackle more market share over time. PagerDuty also enjoys high switching costs exhibiting great retention metrics.

HUYA ADR (HUYA.N)
Recent purchase at $22.74 on April 24.

People are spending more time watching video games than ever before. Gamers between the ages of 18-25 are spending an average of three hours and 58 minutes each week watching as opposed to actually playing. A key beneficiary of this growth has been the video game streaming platforms. Twitch, the leading platform in the U.S., is locked away within Amazon which acquired the business for $970 million in 2014. Huya, the leading platform in China, became public with its IPO in May of 2018.

I believe Huya will be a key video game stock to watch and holds tremendous potential. The company is connecting with viewers at a remarkable rate: Revenue has more than doubled in the past year and fiscal 2019 forecasts predict another 50-per-cent rise in growth. Huya’s total active users jumped 35 per cent last year, topping 110 million viewers. It should also be noted that Tencent Holdings retains a 32-per-cent stake in the company.