Dec 20, 2018

Norman Levine's Top Picks: Dec. 20, 2018

BNN Bloomberg

Norman Levine , BNN Bloomberg

Norman Levine, managing director of Portfolio Management Corp

Focus: North American large caps

MARKET OUTLOOK
I waited until the Fed announced their hike rate yesterday before writing this outlook as, at least in the short-term, investors were going to buy madly if there was no increase and run if there was. Well it was a 100-yard dash as investors realized that the Fed is not as dovish as many had hoped. Even though global growth seems to be slowing the U.S. continues to chug along-- at least for now. Also it could have been professional suicide had Chairman Powell been seen to succumbing to President Trump’s interfering tweets, urging the Fed chairman not to raise rates. Markets around the world are struggling and so far a Santa Clause rally remains a hope, not a reality, with time running out. We think this is a good time to have an extra reserve of cash. We have no desire to time the market (nobody does that successfully and consistently, lots of one hit wonders) but feel it prudent to be carrying cash both as protection as well as for ammunition when markets stabilize and valuations become too enticing to ignore.

TOP PICKS

AMERICAN FINANCIAL GROUP (AFG.N)

We have owned this stock for over 15 years and continue to buy it for new clients. American Financial Group is an exceedingly well run and capitalized specialty property casualty insurer in the U.S. It operates in highly profitable niche markets such as workers compensation, lawyer liability and transportation equipment. Unlike most insurance companies it is highly profitable (with a combined ratio of 95.7 per cent) in its core personal and commercial (P&C) businesses as well as with its investments. It’s P&C insurance subsidiary Great American Insurance Group is one of only five companies rated A or better by A.M. Best for over 100 years. The Lindner family owns 24 per cent of the company. While the current yield is only 1.6 per cent, American Financial Group has increased its dividend every year for the past 13 years and has a history of paying special dividends. In November it paid a special dividend of $1.50 in addition to its regular quarterly $0.40 payment.

NUTRIEN (NTR.TO)

Nutrien is the merged entity of the former Agrium and PotashCorp. It is a diversified fertilizer and agricultural retail company with around two-thirds of earnings from fertilizer production and the rest derived from retail farm centres. We like the outlook for potash where supply and demand is starting to get out of balance and prices are increasing, as well as urea ammonia where supply appears to be inadequate for the next few years. Bad weather in the U.S. Midwest and southern states limited the fall application window as did a late harvest. This should hurt Q4 ammonia volume so earnings will be lighter than previously expected, but this volume should be made up in the spring. Nutrien has a fabulous balance sheet which gives the company lots of opportunities for acquisitions, joint ventures, share buybacks and dividend increases. The stock currently yields 2.3 per cent.

UNI-SELECT (UNS.TO)

Uni-Select is a wholesale distributor of automotive aftermarket parts and paints. It has leading market positions in its three key markets: Canadian aftermarket auto parts, U.K. aftermarket auto parts and U.S. collision paint repair. The stock has been a poor performer since we purchased it 10 months ago as it has had multiple earnings misses despite the optimism exhibited by its CEO. In September Uni-Select announced that its CEO was departing, that it is reducing its earnings guidance for the remainder of the year and that it had hired investment bankers to do a strategic review of the company. We believe the result of that review will be the sale of one of its divisions, FinishMaster, its auto paint shop division. We think Uni-Select has lots of hidden value and this strategic review will unlock some of it. Interestingly enough despite lowering guidance and the CEO departing, the stock has significantly outperformed the market since the announcement, signaling the market expects a higher future valuation. This company has a 1.9 per cent yield and due to the debt it incurred (which it hopes to repay quickly) in its U.K. acquisition, this stock is not suitable for very conservative investors.