Jul 20, 2017

Mohsin Bashir's Top Picks: July 20, 2017

BNN Bloomberg

Mohsin Bashir , BNN

Mohsin Bashir, vice president of investments at Stone Asset Management

Focus: North American large caps
_______________________________________________________________

MARKET OUTLOOK
The S&P/TSX Composite trades at 16.4x and the S&P 500 Index trades at 18.3x 2018 forward price-earnings multiples. We are still in the wake of the largest global accommodative monetary-policy experiment ever conducted, so the goal posts that define “rich” and “cheap” are really just holograms until we get back to a “normalized” interest rate environment and the cost of capital resumes at a level similar to is historical average. It would appear that there are now concerted efforts from central banks across the globe to begin that process of getting back to such an environment. The challenge, however, is that some components of the global economic engine are misfiring, specifically anything that comes out of the ground that doesn’t demonstrate signs of inflation. It is difficult to see how that will drive such a heavily commoditized index such as ours any higher. That said, segments of our index tied to services and/or rising interest rates should get a boost as we double-back from our previously-suggested divergent monetary policy.

TOP PICKS

VISA (V.N) – Last purchased on June 29, 2017 at $94.59
Bolting onto our secular theme of financial technology and the electronification of payments, we find transaction toll-collector Visa attractive as it cycles out of trough earnings. Visa is expanding its market versus fighting for market share. With over $17 trillion in cash and checks globally, Visa has ample runway to grow and gets more bang for the buck by expanding the market as about 60 per cent of the company’s net revenues have been driven by personal consumption expenditure (PCE) penetration. Through the expansion of digitizing the point-of-sale experience, capturing new payment flows, accelerating e-commerce, and enabling the Internet of Things, Visa increases the “ways to pay” and its own “ways to get paid.” Strong fundamentals are demonstrated through enviable organic revenue growth, 50 per cent+ operating margins, mid-teens earnings/share growth, and significant free cash flow generation.

JAMIESON WELLNESS (JWEL.TO) – Last purchased on July 7, 2017 at $16.90
Jamieson Wellness is the No. 1 Canadian consumer health brand with 25 per cent market share, which is bigger than its five closest competitors combined. Its IPO came out in June and the deal was very well subscribed. We would expect the success of the IPO to be somewhere in between MedReleaf and Dollarama, preferably the latter. Private investor CCMP Capital has already implemented significant cost-reduction initiatives, so the “show-me” part of this story will reside in the company’s ability to grow top-line revenues. Jamieson has strong brand recognition in Asia where 10 per cent revenue growth is not uncommon. Its products are available through retail grocery/pharma outlets, big-box retailers and specialty stores/vitamin shops. The balance sheet looks reasonable with pro-forma debt/EBITDA coming in at 2.9x. We expect dividends to represent about 30 per cent of free cash flow in 2018, and to grow over time. Jamieson sees potential for 60 per cent+ EBITDA CAGR through to 2021 and 18 per cent to 20 per cent EPS growth during that period.

MDA CORP. (MDA.TO) – Last purchased on May 3, 2017 at $64.50
MDA Corp. is a global communications and information company with expertise in surveillance and satellite development. The company has been working hard at establishing itself with the correct organizational structure to pursue highly-classified surveillance work with the U.S. government. The company, through its wholly-owned subsidiary SSL MDA Holdings based out of San Francisco, California, announced with the U.S. Department of Defense that they have signed a security control agreement, completing an important step in the process to gain contract work in the U.S. Government space and defence markets. They have recently re-submitted their application with the U.S. regulator to purchase Digital Globe, and so the stock is in stasis until that hurdle gets passed or until there is greater appetite for commercial satellites.