Jul 11, 2018

Mike Newton's Top Picks: July 11, 2018

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

Global growth remains remarkably strong as a mutually reinforcing expansion is occurring across much of the globe. At this stage, the global economy remains sufficiently robust to deal with reasonably minor trade skirmishes. Having said that, the escalating risk of a major trade war represents a clear and present danger to the expansion. The negative noise surrounding the stock market is getting louder, resulting in more violent moves in equities. While the bull market uptrend is still in place and short-term technicals have improved, I believe the S&P 500 is still in “correction” mode until new all-time highs are made. The index needs to rally 2.8 per cent from current levels to break out above its old highs that were established back on Jan. 26, 2018. Regardless of the severity of any potential trade war, I will be monitoring the situation carefully as it would be dangerous to belittle it. While many market indicators remain constructive, you must be able to adapt swiftly if that changes to the negative. Don’t worry about what the markets are going to do (otherwise all you would do is worry). Instead, worry about what you’re going to do in response to changes in the market direction. In other words: have a plan.

TOP PICKS

ROPER TECHNOLOGIES (ROP.N)
Most recent purchase on May 4 at US$275.

Roper embraces a multi-industry model by structuring its enterprise as more than 40 distinct businesses, each headed by a different operating company president and running independent profit and loss statements. Each business is given enough autonomy to operate with a discrete strategy. This has led to more entrepreneurial businesses that are quick to react to any given change.

Over the past decade, Roper has acquired niche software and network-based businesses that are typically under the radar of many other larger industrial companies, such as healthcare GPOs (group purchasing organizations), ERP (enterprise resources planning) software providers, and business management software for legal and professional services firms. The result is a company that manages among the sector’s highest operating margins and a negative working capital balance, meaning that it generates cash as it operates (rather than consume cash).

SOFTBANK (9984.TYO) (SFTBY.US)
Most recent purchase on April 20 at US$37.80.

Softbank is a Japanese multinational holding conglomerate headquartered in Tokyo. The company wholly owns Softbank Corp., Softbank Vision Fund, Arm Holdings, Fortress Investment Group and Boston Dynamics. It also owns stakes in Sprint (85 per cent), Alibaba (28.2 per cent), Yahoo Japan (42 per cent), and Uber (15 per cent), to name a few. Softbank has amassed a $100 billion technology investment fund called the Vision Fund. A Silicon Valley venture capitalist calls it “the most powerful investor in our world” right now. That $100 billion is more than all the world’s venture capitalists raised in 2016 combined.

It was announced this week that Tiger Global took a $1 billion stake in SoftBank. In a letter to investors, Tiger Global calls SoftBank stock “meaningfully undervalued” and that the “combination of a world-class set of assets trading at a record discount to NAV strikes us as an odd anomaly that’s unlikely to exist forever.” Tiger Global was one of the hedge funds created by former portfolio managers at Tiger Management.

COTY INC (COTY.N)
Most recent purchase on June 6, 2018 at US$13.50.

Coty is an American beauty products manufacturer with operations in over 150 countries. With $300 billion in retail sales globally in 2017, it’s no. 3 in the world behind L’Oreal and Estee Lauder. It has the no. 1 position in fragrances, no. 2 in salon hair care and no. 3 in color cosmetics. It produces fragrances, color cosmetics, skin and body care products, and hair products.

Coty is known for its cooperation with designers and celebrities for the creation of fragrances. Its biggest brands are CoverGirl and Max Factor (acquired from P&G in 2016), Adidas, Calvin Klein, Hugo Boss, Gucci, Burberry, and Wella Professionals as well as Chloe (fragrance) and Davidoff (fragrance). Shares are currently trading near all-time lows and we initiated a position.