Apr 30, 2018

Mike Newton's Top Picks: April 30, 2018

BNN Bloomberg

Mike Newton , BNN

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

Get ready to hear the term “second derivative” often in the coming months. Yes, we’re experiencing global expansion, but the rate of change of global growth is slowing. Yes, we’re seeing strong beat rates for EPS and revenues and very strong guidance, but the second derivate (the reaction and revisions) to those beats hasn’t been as strong as evidenced by the continued intra-day selloffs and broad selling late in the day. As a result, the broad equity markets have been in consolidation mode for almost three months now. The damage in terms of ground lost continues to be quite modest and well contained. Unfortunately, any whiff of margin pressure has been brutally punished even when current earnings have remained respectable. The increasingly confused response of equities both at the level of the overall index and various sub-indexes suggests a lack of longer-term investment decisions being taken, and that short-term trading is dominating market activity. I could list off dozens of positives, but the fact remains that the market is currently preoccupied and a continuation of the downtrend from the January highs which remains in place, until that downtrend is broken or the market reacts better to positive news, I would be slow to add large lump sums of cash into this market. This can be reversed equally quickly should the mood of the market turn positive once more. My view remains that this disorderly correction will prove to be a consolidation of the overall bull market, rather than its actual demise.

TOP PICKS

ECOLAB (ECL.N)
Most recent purchase on April 17, 2018 at US$144.

Headquartered in St. Paul, Minnesota, Ecolab is global provider of water, hygiene and energy technologies and services to the food, energy, healthcare, industrial and hospitality markets. Last month, it was disclosed that Bill Gates had bought another $50.4 million in shares. The latest purchase brings Cascade’s stake to 30.2 million Ecolab shares. Including the 4.4 million shares held by the Bill & Melinda Gates Foundation Trust, Gates now controls a 12 per cent stake in the company.

The company provides fundamental enduring needs that transcend market conditions: clean water, safe food, and healthy environments. It’s undergoing a digital transformation, harnessing the Internet of Things to collect, analyze and deliver solutions. Capital deployment will remain integral to Ecolab’s long-term story. We’ve seen a pickup in tuck-in M&A over the past few quarters and expect the emphasis to be on expanding healthcare, life sciences, water and pest elimination. We also expect some modest stock buybacks in 2018.

LYONDELLBASELL (LYB.N)
Most recent purchase on April 17, 2018 at US$106.

LyondellBasell Industries NV is a quality chemicals play with a solid track record of cash flow generation and strong shareholder returns. It’s a multinational chemical company with American and European roots incorporated in the Netherlands, with U.S. operations headquartered in Houston and global operations in London. The niche chemical producer is earnings praise from investors for several reasons:

Petro-derived revenues should get a lift from an improving crude oil outlook.
Profitability should improve given the feedstock cost advantage from low-cost U.S. natural gas.
LyondellBasell’s vertically integrated business model gives the company significant advantages over competitors.
It continues to reward shareholders through dividends and share repurchases.

OKTA (OKTA.O)
Most recent purchase on Feb. 22, 2018 at $35.77.

Okta is a pioneer in the young-but-fast-growing field of identity and access management. The company's cloud-based software platform works by creating a secure identity profile of an individual, which can then be matched against whatever kind of digital rights and access they require. That means employees don't have to wrangle with dozens of passwords and IT managers can also seamlessly control any number of other policies and credentials.

Okta recently reported fiscal Q4 revenue and profit that topped analysts’ expectations and forecasted higher revenues and earnings for the quarter and the full year as well. CEO Todd McKinnon pointed to the company’s 64 per cent increase in subscription revenue and its improvement of 17 percentage points in its free cash flow margin. As every organization modernizes its business (and has to do so more securely), Okta continues to gain traction. Identity is becoming a foundational technology and organizations in every major industry are turning to companies like Okta.