Full episode: Market Call Tonight for Tuesday, October 8, 2019
Mike Newton, director of wealth and portfolio management at Scotia Wealth Management
Focus: North American large caps and ETFs
Economists and prognosticators are increasingly predicting that the U.S. economy might be headed for recession, but the specific circumstances of the current economy are far from those that led to the financial crisis.
I have repeatedly opined that recessions typically follow periods of excesses. I would say that at the moment we’re in a much different mindset dominated by risk aversion. It's not slow growth that precipitates a recession, but too much risk-taking and optimism eventually colliding with reality. The cannabis boom has reset, the Bitcoin craze subsided and the recent heady IPO rush was successfully squashed in an instant.
My current take is that we’re consolidating in a secular bull market – and it’s pretty normal stuff. We went through this from 2014 through early 2016; this is simply the 2018-2019 version. The U.S. market, as measured by the S&P 500, is exactly where it was in June 2018. Even worse, the Canadian market as measured by the S&P/TSX, is exactly where it was in December 2017. We all need to be patient as we wait for the next big trends to develop.
On the downside, signs that the consumer sector is joining manufacturing as an economic drag would make me more bearish. On the positive side, receding political risks, signs of a substantive trade deal or a recovery in manufacturing would make me more bullish. We don’t see either outcome as particularly likely in the short term, but if we were forced to choose a side, we would lean more toward the positive. My message: Be patient, not bearish.
KB HOMES (KBH:UN)
Recent purchase at $32.06 on Sep. 25.
KB is one of the largest homebuilders in the U.S., with 11,317 closings and $4.5 billion in revenue in 2018. The company has operations in eight states, with a particular emphasis in California. KB has been one of the better turnaround stories in homebuilding over the past several years, showing significant improvement in top-line growth margins, and return on equity. Its stock has gained almost 70 per cent so far this year as mortgage rates have dropped, making new home purchases more affordable. The macroeconomic outlook remains positive, given the strong consumer, favourable demographics and a continued new home supply deficit. The stock continues to be worth owning as the housing cycle continues to exude strength. At 1.3-times book value, it trades at a moderate discount to larger peers.
MCCORMICK & CO. (MKC:UN)
Recent purchase at $160.76 on Sep. 25.
McCormick is the leader within the fragmented US$10-billion global herbs and spice industry, which is expected to grow at a 5-per-cent annual rate through 2021. It has a 20-per-cent share of this market, or approximately four times that of its closest competitor. Spice consumption per capita has nearly tripled in the U.S. over the past 40 years and should continue to rise on the back of secular growth trends in travel and leisure.
In the past three years, sales are up 26 per cent to $5.4 billion and the stock price has doubled. That market performance and a reputation for creativity in a commodified industry is what brings us into this name. Much of that growth has come from the purchase of the food assets of U.K.-based Reckitt Benckiser Group for $4.2 billion, more than the combined cost of all acquisitions made in McCormick’s 130-year history.
CROWN CASTLE (CCI:UN)
Recent purchase at $136 on Oct. 2.
Crown Castle is well positioned to benefit from the continuing deployment of wireless capacity and coverage in the U.S. and has clear visibility of revenue and earnings due to long-term contracts. Site leasing demand from new leases and amendments remains robust. Customer demand is driven by 30 to 40 per cent growth in data traffic and the need to maintain the user experience.
In the long term, carriers are competing on network quality. They will likely use a mix of both macro sites and small cells, with Crown well positioned for both. The 4G to 5G overlap is expected to be more elongated than previous technology transitions, extending the growth opportunity for tower companies. While there is limited visibility into carrier spend, 5G has the potential to increase overall capex levels as operators see opportunities and find use cases to justify the buildout. Crown’s investment appeal is enhanced by its attractive 3.25-per-cent dividend and its U.S. focus, as other tower company peers diversify their activities into international markets.
PAST PICKS: NOV. 20, 2018
CME GROUP (CME:UW)
- Then: $192.16
- Now: $212.14
- Return: 10%
- Total return: 13%
- Then: $156.06
- Now: $189.65
- Return: 22%
- Total return: 23%
- Then: $133.37
- Now: $172.42
- Return: 29%
- Total return: 30%
Total return average: 22%