Mike Newton's Top Picks: June 5, 2019

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

MARKET OUTLOOK

As we start June, we are in an oversold market desperate for positive news, real or perceived. It’s incredible how “noisy” the markets and the media can be. Because the current worries are so well-documented, we must try to think outside of the negative news loop. As the worries are addressed or even resolved, the investor who looks beyond the obvious should benefit handsomely. We must understand there is a wide difference between “unattractive” and “dangerous.” It’s one thing to recognize that valuations are high and economic fundamentals are slowing and quite another to predict doom. I reject the notion that the uncertainty today is somehow unique relative to history. I would position for a breakout to the upside. However, anything is certainly possible, so one must be willing to change your mindset if the facts or direction changes.

TOP PICKS

BAOZUN (BZUN.O)
Most recent purchase June 4 at $37.86.

Baozun could be described as the Shopify of China. The company offers partners end-to-end e-commerce solutions, including IT infrastructure, product sales, online store design and setup, customer services, warehousing, marketing and order fulfillment. Shares are currently 40 per cent off of the 52-week high.

Baozun works with many big brands like Nike and Microsoft in connecting their physical and online retail spaces. The company operates in three main segments: Part of the company takes a fee for digital services (like Shopify); it also runs a fulfillment business (similar in many respects to the Amazon model); and it actually owns some of the stuff it sells (especially apparel and electronics). The company is currently transforming itself from focusing more on the service fee and consignment model and less on distribution.

The recent miss last quarter underpins Bazoun’s desire to invest in its core strengths as the expense lines were higher than expected. The first quarter saw total net revenue increasing 40 per cent and operating income surging 61 per cent on higher operating margin, even with operating expenses climbing 39 per cent. The total number of brand partners increased to 200.

ILLUMINA INC (ILMN.O)
Most recent purchase April 4 at $314.57.

The DNA revolution is truly just starting and Illumina is considered to be synonymous with gene sequencing. Its latest instrument, NovaSeq, is anticipated to reduce the cost of sequencing the human genome to as low as $100. This would likely cause an even bigger explosion of use. And that would have positive benefits for rare disease and cancer diagnosis and treatment, prenatal testing, population genomic studies, and consumer genomics like 23andMe and Ancestry.com. Not only does Illumina benefit from selling its instruments, but it also sells the consumables (kits and other equipment) used by them, which need to be regularly restocked. It generated a record free cash flow of over $700 million over the past four quarters.

U.S. law enforcement are starting to make use of consumer genetic databases. The new forensic approach has been cracking some famous cold cases. It’s estimated that Illumina is less than 3 per cent penetrated from a revenue perspective in a global market estimated to be $140 billion. It’s expected to remain the dominant sequencing leader for years to come.

BROOKFIELD PROPERTY PARTNERS (BPY_u.TO)
Last purchase on June 4,at $25.10.

Over the last two weeks, the stock has been down 10 per cent while the REIT sector is positive. Last month, the MSCI announced the removal of Brookfield Property REIT shares from all indexes. This action seems to have driven an even greater discount for BPY to its peers. I suspect the negative flows have likely peaked and would be looking to take advantage of the widened valuation discount.

BPY is trading at a significantly wider discount than average, which should not be the case given the dramatic shift in interest rate expectations. These discounts continue across every metric and one could argue that given BPY’s higher-than-average leverage the stock should underperform in a higher rate environment, but with rates making new lows, we believe the market should be less concerned with leverage issues. 

BPY is diversified by both asset class and geography, with office and retail accounting for 42 and 44 per cent of fourth-quarter invested capital respectively, while an estimated 80 per cent of invested capital is in North America. The company is a major player across global property investment markets, having pro-rata interests in $87 billion of property and related assets and a common equity market cap of $20 billion.

PAST PICKS: APRIL 5, 2018

ISHARES FRONTIER 100 FUND ETF (FM.O)

• Then: $35.22
• Now: $29.10
• Return: -17%
• Total return: -14%

SMART CENTRES REIT (SRU_u.TO)   

• Then: $29.52
• Now: $32.93
• Return: 12%
• Total return: 19%

ARISTA NETWORKS (ANET.N)

• Then: $262.74
• Now: $263.63
• Return: 0.5%
• Total return: 0.5%

Total return average: 2%

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