Apr 17, 2019

Norman Levine's Top Picks: April 17, 2019

BNN Bloomberg

Norman Levine , BNN Bloomberg

Norman Levine, managing director Portfolio Management Corp.
Focus: North American large caps

MARKET OUTLOOK

We've been carrying an above-average amount of cash since the fall of 2018 as we thought that world economies would slow and that markets would follow suit. We’ve been partly right. World economies have slowed and are expected to continue slowing for the near future; in the fourth quarter, stocks took a brutal dive based on this and on sharply declining interest rates which were foreshadowing the slowdown. However, so far in 2019, markets around the world have reversed and recovered all their previous losses despite no improvement in the economic outlook or any increase in interest rates, which would foreshadow a more favourable economic outlook. In addition, corporate profits are expected to have a tough time showing much meaningful growth this year. For those reasons, we will continue to carry more cash than normal.

TOP PICKS

CENOVUS (CVE.TO)
Bought on Feb. 20, 2019 at $11.678.

Cenovus is one of the largest energy producers in Canada, of which 80 per cent is oil (largely oil sands) and 20 per cent natural gas. It owns long life, low decline assets, mostly heavy oil. Production growth has been stagnating due to a lack of pipelines to handle any additional production. A three-year rail contract it recently signed will help.

The company had a difficult 2018 due to high-debt levels and poor hedges. Its new CEO has strong operational skills and has cut its hedging program and reduced the debt through asset sales. Helping earnings are its 50-per-cent ownership of two U.S. refineries.

We want to increase exposure to energy stocks when oil is rising or staying at a high level and reduce it when it declines. With oil stocks greatly lagging the price of crude and Canadian oil selling at a large discount, now it’s a good time to buy Cenovus. One worry is the overhand in the stock. as ConocoPhillips owns 17 per cent of shares. Eventually, that position will be offered into the market, but we believe it will be at significantly higher prices from today.

BB&T CORP. (BBT.N)
Bought Jan. 12, 2012 at $26.96.

BB&T is a regional consumer bank headquartered in North Carolina and operating largely along the U.S. east coast.

BB&T is buying SunTrust in a friendly transaction, which will make it the America’s sixth largest bank. The merger brings with it economies of scale with respect to technology, compliance, headcount and real estate. The merged banks have a growing footprint, mostly on the Eastern seaboard. They will have a roughly 60-40 per cent split between interest income and fee income. BB&T’s revenue stream will be quite diverse: insurance brokerage, credit cards, capital markets, mortgage and commercial banking. Both banks are well managed, so this is not a turnaround situation.

We currently prefer U.S. banks to Canadian banks on a valuation and risk basis. BB&T’s current yield is 3.3 per cent and we expect its dividend to continue to grow regularly at a rate well above the industry average.

NXP SEMICONDUCTORS (NXPI.O)
Bought on Oct. 16, 2018 at $80.59.

NPXI makes semiconductors for a variety of uses, but it specializes in two main areas: driverless cars and connected factories. Both are growth areas today and in the future. The company should be able to grow its revenue in the 5-to-7 per cent range.

NXP is reasonably valued today given its potential growth rate due to the fact that Qualcomm had to abandon its acquisition of the company in 2018 as a result of the U.S.-China trade dispute. In a takeover deal, the main shareholders change from long-term shareholders to arbitrageurs who are looking to make a profit from the takeover deal. Once a deal is abandoned, this dynamic goes into reverse: short-term arbitrage traders look to exit and long-term shareholders look to enter. However, there’s a mismatch in the time horizon that’s causing a sizable drop in the stock price. The company’s share price has risen recently as arbitrageurs have moved on. Qualcomm was willing to pay $127.50 for NXP shares, whereas now it trades at around $100. That price differential represents a discount of over 20 per cent relative to what Qualcomm was willing to pay. Given the growth of NXP end markets, its value should continue to grow.