Sep 25, 2018

Mike Newton's Top Picks: Sep. 25, 2018

BNN Bloomberg

Greg Newman , BNN Bloomberg

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

MARKET OUTLOOK

New developments in U.S.-China trade relations, Brexit and NAFTA negotiations have been met with muted reactions in global financial markets. North American equities continue to grind higher as they approach important long-term technical levels, and economic data have been broadly supportive of the global growth narrative. The U.S. dollar index (DXY) has pulled back modestly over the past month, reducing stress on emerging markets and driving global equity market gains. U.S. growth outperformance has been a key feature of the macro environment in recent months. I think it would be healthy to see the U.S. dominance moderate and converge somewhat with the rest of the world. This convergence would create the potential for an important comeback in emerging market assets. We’re just a couple of weeks away from the start of second-quarter earnings season, which comes on the heels of a pretty upbeat first quarter. There may be some caution further down the pipeline for the third quarter: the percentage of S&P 500 companies issuing negative earnings guidance is the highest since the first quarter of 2016.

The U.S. market is somewhat overbought in the short-term, but that has been some degree of “marking time” which is now turning previous resistance — when the market broke out to new highs — into support, which is a healthy situation. As long as the market holds here over the next few weeks, I continue to expect a further advance forward by year-end. The one thing about bullish sentiment is that it begets more bullish sentiment. The more the market rises, the more ingrained the belief comes that it can only go higher. This cycle can, and often does, last longer than logic would dictate and because of that, we remain long-raised in our portfolios. Having said that, risk-taking when valuations are rich could produce losses that may entirely cancel out your success. I’m well aware of the myriad of present risks and for that reason mental stop loss levels should be tightened. There’s a real possibility of two major generational icebergs floating in the markets choppy waters: the potential for a long-term rising rate environment not seen for 30 years and the global repositioning of trade. With the trend of the market positive, we want to continue to participate to lock-in performance now for a rainy day later, but our stops will generate the cash when that time comes.

TOP PICKS

RESMED (RMD.N)
Recent purchase: Sep. 19, 2018 at $113.01.

Sleep is restorative for the body and mind. More than 18 million Americans have obstructive sleep apnea (OSA). Without the sleep required, your risk of heart complications can increase. ResMed is a world-leading connected health company with more than 5 million cloud-connected devices for daily remote patient monitoring. As they say, they’re "changing lives with every breath.” Its award-winning devices and software solutions help treat and manage sleep apnea and chronic obstructive pulmonary disease (COPD). The integration of data and technology is the key to driving increased awareness and treatment and ResMed is leading the industry with over 2.5 billion nights of medical sleep and respiratory care data in the cloud. The opportunity to shift care from hospital to home is a major initiative around the world. The company is gaining strength in the U.S. market, where ResMed has gained share in both product categories, which is due in part to increased awareness of RMD's cloud-connected offerings.

LULULEMON (LULU.O)
Recent purchase: Sep. 19, 2018 at $154.58.

There’s a lot of positivity out there for stock in Lululemon. I expect to the company to enjoy a renewed wave of investor interest. The Canadian activewear giant made yoga pants a status symbol. Now facing competition from countless activewear startups, Lululemon is eyeing its future in a post-athleisure world, where comfort – not product categories – determines what consumers wear to work as well as the gym. By capitalizing on this individualized, data-based style of customer experience, the brand wants to push the athleisure genre it pioneered in the 2000s forward. Prior operational clouds in the supply chain and the digital channel are dissipating, which should lead to sustainable outperformance going forward. Improving digital operations, the possibility of a powerful loyalty program, international opportunities, and a consumer-friendly economic environment are all tailwinds for the brand. Last year, the company’s annual revenue surpassed $3 billion and it had a network of 450 stores–and counting– in North America, Europe, Asia, and the Middle East. It has 13,500 employees across the world.

TRADE DESK INC (TTD.O)
Recent purchase: Sep. 19, 2018 at $142.27.

There’s a fundamental shift happening in advertising and it’s bigger than just a move to digital. The Trade Desk is a technology company that empowers buyers of advertising. They provide a self -service, cloud-based platform to agencies who deliberately pick from over 500 billion digital ad opportunities a day. Integrations with major data, inventory, and publisher partners ensure maximum reach and decision-making capabilities, and enterprise APIs enable custom development on top of the platform. The future of all media is digital and programmatic. Many believe that someday all media will be digital and it will be transacted by machines. Large brands have just started in programmatic. They aren’t trying to replace the advertising agency. Instead, they’re an enabler, not a disruptor. They align agencies and their brands. Over the past two years, Trade Desk has enjoyed 61 per cent revenue growth and 30 per cent margins with consistency. In addition, they’ve experienced a 95 per cent client retention rate. The Trade Desk recently released its biggest product launch ever. “The Next Wave” includes a new media planner, a new user interface and a new artificial intelligence engine to help its clients better design, implement and monitor programmatic ad campaigns. I believe the company is an investment in the whole Internet.