Jan 18, 2019

Norman Levine's Top Picks: Jan. 18, 2019

BNN Bloomberg

Norman Levine , BNN Bloomberg

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

MARKET OUTLOOK

Why did equity markets have such a rough time in the fourth quarter? Basically, the U.S. economy has been the strongest major economy and has been literally carrying the rest of the world. Bull markets don’t die of old age (the one in the U.S. has been going since March of 2009), but usually from the Federal Reserve raising rates once too often, choking off the economy. Fears that the Fed has already made that move, (or will sometime in 2019) have caused stocks to fall in recent months. The same fears concerning the Bank of Canada have affected the Canadian market as well. The answer to everyone’s question is that it’s too early to tell whether the downdraft in share prices is merely a correction or the beginning of a bear market. Like everyone else, we don’t know, but by holding a larger-than-normal amount of cash in our clients’ accounts, we aren’t taking any chances.

TOP PICKS

NUTRIEN (NTR.TO)
Bought on June 11, 2018 at $69.43.

Nutrien is the merged entity of the former Agrium and Potash Corp. It’s 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 both potash, where supply/demand is starting to get out of balance and prices are increasing, and for ammonia/urea, 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. However, this volume should be made up in the spring. Nutrien has a fabulous balance sheet, which gives them lots of opportunities for acquisitions, joint ventures, share buybacks and dividend increases. The stock currently yields 2.3 per cent.

KONE (KNYJF.PK)

Kone is the world’s second or third largest elevator and escalator company (essentially tied with Schindler at 18 per cent market share). Its operations are divided between new installations and service. New installations are dependent on economic growth. Growth is largely dependent on four things: Urbanization, technology disruption, demographics and safety. There has been margin pressure recently as some competitors are acting as if elevators were the razorblade business, giving away the elevator in exchange for long service contracts. The service business (about 40 per cent of revenues) is very high margin and defensive and is currently driven by established markets. Kone is highly profitable with a return on capital of 80 to 100 per cent. The company is in a net cash position (no debt) and increases its dividend on a regular basis. Kone currently yields 3.8 per cent. The Herlin family owns all the voting shares and 10 per cent of the subordinated (Class B) voting shares.

KUEHNE + NAGEL INTERNATIONAL (KHNGF.PK)
Bought on April 4, 2013 at 102.30 Swiss francs.

Kuehne + Nagel is the world’s second-largest third-party logistics company, incorporating sea freight, air freight, road and rail logistics, contract logistics, real estate and insurance brokerage. The logistics industry is a defensive sector, with attractive growth characteristics. The company has a strong balance sheet with net cash of approximately 1.7 billion Swiss francs and a 4.3 per cent yield with a dividend that grows each year. The company has no debt and sports a return on equity of 33 per cent. We expect it to benefit from the growth in import/export trade volumes between developed economies, among emerging and developing economies and among high-growth emerging economies. It’s an excellent way to play the growth in global trade. The Kuehne family owns 53 per cent of the shares and its foundation owns an additional 5 per cent.