Mike Newton's Top Picks: Nov. 20, 2018

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

MARKET OUTLOOK

Seeing portfolios drop precipitously in a matter of weeks can trigger all kinds of worry. 10 year ago the world was being gripped by one of the worst financial crises since the Great Depression and developed economies all across the globe were in free fall. Of course, definitive predictions are impossible and risks certainly exist, but people are letting their emotions colour what should be a more rational assessment of the probabilities of various outcomes. The idea that the outlook is now even remotely as bad as it was in November 2008 is offside.

The general consensus is that it’s all downhill from here. Investors seem very worried about “peak earnings.” First, it’s important that we draw a distinction between peak earnings and peak earnings growth. Peak earnings would suggest that earnings growth will begin to turn negative, implying a profits recession; that would indeed be a very bearish signal for stocks, but I see no signs of an imminent profit recession in my research. A key risk to the global economic outlook is U.S. monetary policy remaining too domestically centered and the Federal Reserve overtightening while 80 per cent of the world economy is slowing down at an accelerating pace. We’re starting to see turn-up in credit defaults spreads, which is concerning.

The growth trade unwind is taking a toll in tech, communications and discretionary sectors, which are by far the worst performers so far in this selloff. Value-oriented sectors are doing relatively well, with real estate, utilities, financials and staples rising of late. Slower global growth, trade tensions with China and U.S. dollar strength could make it challenging for tech to regain relative earnings leadership and therefore for growth to outperform value. Moreover, the uptrend in bond yields is likely to extend, offering more headwinds to high price-to-earnings (P/E) stocks than low P/E stocks.

Right now, we have a neutral stance. High cash positions in portfolios will protect capital in the short-term. The goal is not to be forced into a “panic selling” situation. Cash will represent a competitive asset class to stocks for the first time in many years. If I’m wrong and the bull market resumes, we’ll simply spend our cash and reallocate equity exposure at potentially deeply discounted values.

TOP PICKS

CME GROUP (CME.O)
Recent purchase: Oct. 24, 2018 at $182.35.

As the world's leading and most diverse derivatives marketplace, CME Group is where everyone comes to manage risk. It owns and operates large derivatives and futures exchanges in Chicago, New York and exchange facilities in London using its online trading platform. As CME matches counterparties in its role as an electronic intermediary, it profits from the transaction fees it charges. As volume increases, so does its profit. Economic uncertainty and unpredictable financial markets have led to trading volume increases throughout the year. The second quarter was the company's second-best quarter ever in average daily volume, with 12 per cent growth. That led to a 15 per cent rise in revenue and 36 per cent growth in earnings per share. International growth has been a highlight as well. Average daily volume overseas was 14 per cent higher year-over-year, with 30 per cent growth in Asia alone.

ECOLAB (ECL.N)
Recent purchase: Sep. 12, 2018 at $155.36.

Headquartered in St. Paul, Minnesota, Ecolab is a global provider of water, hygiene and energy technologies and services to the food, energy, healthcare, industrial and hospitality markets. Bill Gates and related entities control an estimated 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 (IoT) to collect, analyze and deliver solutions. Capital deployment will remain integral to Ecolab’s long-term story. The company is very well positioned to benefit from the convergence of population growth, resource volatility and rapid industrialization across the world. Its recurring services model drives high visibility even in a tough macro environment with raw material and FX headwinds. Cash generated from operations for the year stands at $1.45 billion. Management expects healthy free cash flow conversion for the year.

VISA (V.N)
Recent purchase: Sep. 12, 2018 at $145.53.

Visa is at the center of new payment flows that represent more than $200 trillion in volume, four times the current addressable market. As new markets and technologies such as business-to-business (B2B), the IoT, and push payments proliferate, all driven by many of the “change forces” facing society and technology, Visa is defending itself admirably from Square, PayPal and Venmo among others. It stands out as a beacon of trust around the world, which will enable it to capture a disproportionate amount of share in these new payment flows. The more immediate opportunity comes from small business owners, who are increasingly utilizing cards (virtual cards included) to operate their business, as well as Visa Direct, which can enable small businesses to send and receive vendor payments. The longer-term opportunity, however, will come from Visa’s new B2B Connect, which is a distributed ledger technology for large enterprise payments.

PAST PICKS: DEC. 5, 2017

HOME DEPOT (HD.N)

• Then: $182.85
• Now: $169.05
• Return: -8%
• Total return: -6%

FRANCO-NEVADA (FNV.TO)

• Then: $99.90
• Now: $91.00
• Return: -9%
• Total return: -8%

DIGITAL REALTY (DLR.N)

• Then: $113.02
• Now: $108.00
• Return: -4%
• Total return: -1%

Total return average: -5%

WEBSITE: www.newtongroupwealth.com