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

MARKET OUTLOOK

This pandemic has been a horrifying experience, with over 330,000 deaths and countless millions of unemployed. Yet with this backdrop, the stock market has repaired a good portion of the damage.

The strong are getting stronger. Many companies in the midst of the shutdown aren't standing still. They're reengineering their operations, learning to be more digital and run with fewer employees and less real estate. Because the financial strength of big companies makes them more likely to survive the downturn, their share prices tend to underplay the impact of a widespread economic collapse. The giant companies that make up the S&P 500 and the TSX operate under very different circumstances than the nation's small businesses, workers and cities. Many are highly profitable and hold significant sums of cash. Remember that the share prices today include expected profits over the next five years or more, and in a zero interest rate environment, those future profits are worth even more today than usual, meaning higher share prices.

Position your portfolios in the strong and healthy and you should be rewarded. But as economic activity has rebounded and some businesses are attempting to move back to normal in parts of the world, there is an obvious risk that this restart proves premature and excessive, resulting in a heart-breaking double-dip from an economic standpoint and a double-spike from a virus perspective. That’s why you need a portfolio manager who is nimble and willing to raise cash in such events. The major question that remains is whether or not this tale of two markets can continue to persist indefinitely or if these divergences will need to resolve themselves by either the strong areas catching down to the weak, or vice versa. If the recent market environment has taught us anything, it’s that markets are dynamic and relationships like these are constantly changing.

TOP PICKS

SONOS (SONO NASD)
Last purchased at $9.63 on May 7.

Though the company has certainly seen its share of problems this year owing to its vast retail footprint and a large portion of its sales made through brick-and-mortar channels, Sonos as a brand has become more relevant as people are stuck inside spending more on home entertainment.

Alibaba, looking to remain a leader in a competitive market, said this week it will invest $1.4 billion to develop AI-powered smart speakers. I believe the smart speaker market still has room to grow, and what is to say that Sonos doesn’t get snapped up by a larger U.S. technology name?

ECOLAB (ECL NYSE)
Last purchased at $169.28 on April 21.

Ecolab is a leading provider of cleaning and sanitizing products and services as well as water treatment chemicals and services. With many restaurants and other workplaces closed, the company could see earnings dip this year before rebounding into 2021. Overall, Ecolab remains well positioned to drive above-market growth and expand margins in a challenging environment. 

SHOPIFY (SHOP TSX) 2020
Last purchased at $970.22 on May 6.

This may come as a surprise given Shopify’s stratospheric 108 per cent move in 2020 and the name at new highs. That move has left many puzzled potential investors on the sidelines. That is a mistake. Credit Suisse published an interesting note with an underlying comparative of Shopify to Amazon. Modeling a pathway similar for Shopify to that of Amazon earlier in its lifecycle warrants ample upside with continued robust growth and a very meaningful ramp in profitability. Credit Suisse goes on to say that currently, Shopify possesses the second greatest weight on the S&P/TSX and yet a potentially Amazon-like trajectory could result in an index weight reminiscent of Nortel in 2000 along with a broader re-visitation of the TSX 299.

PAST PICKS: MAY 14, 2019

COMCAST (CMCSA NASD)

• Then: $42.91
• Now: $38.78
• Return: -10%
• Total return: -8%

ALIBABA GROUP (BABA NYSE)

• Then: $174.84
• Now: $203.33
• Return: 16%
• Total return: 16%

FRANCO-NEVADA (FNV TSX)

• Then: $101.68
• Now: $208.78
• Return: 105%
• Total return: 108%

Total return average: 39%