Jul 3, 2019

Norman Levine's Top Picks: July 3, 2019

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Norman Levine's Top Picks

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

MARKET OUTLOOK

Even though markets feel like they are doing well, in reality both the TSX and S&P 500 are only back to where they were last September. We’re not convinced stock markets are poised for big gains in the next few months and therefore we continue to carry an above average percentage of our clients’ assets in cash. Low interest rates continue to inflate stock valuations although that can be taken too far, with negative consequences as we see in Europe, where negative interest rates are threatening to financial viability of many of their banks. North American investors remain oblivious to this, at least for now. As for fixed income, many investors are unhappy with bond yields as low as they are and want to reduce exposure as a consequence. We believe this to be a mistake as bonds are for capital preservation, as well as income, and investors who are becoming too complacent in the stock market ignore them at their peril.

TOP PICKS

Norman Levine's Top Picks

Norman Levine, managing director at Portfolio Management Corp, shares his top picks: Nutrien, Wells Fargo and NXP Semiconductors.

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/agriculture retail company with around two thirds of earnings originating from fertilizer production and the rest derived from retail farm centres.

We like the outlook for 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 throughout much of North America in the past six months has hurt plantings and therefore current earnings, but this has no effect on future demand. Nutrien has a fabulous balance sheet, which gives it lots of opportunities for acquisitions, joint ventures, share buybacks and dividend increases. The stock currently yields 2.3 per cent.

WELLS FARGO (WFC.N)
Bought on Oct. 12, 2018 at $52.16.

Wells Fargo is the world’s second largest bank by market capitalization and the fourth largest bank in the U.S. by total assets. It provides banking, mortgage, investing, credit card and personal, small business and commercial financial services to its clients.

The opportunity to purchase a strong U.S. banking franchise exists due to a large number of missteps made by Wells Fargo in recent years, all of which should be corrected. These are temporary issues as opposed to permanent ones. The issues include creating fake accounts, illegally repossessing cars, selling dangerous investments, among others. These led to congressional and SEC probes. In February 2018, the Federal Reserve limited Wells Fargo’s growth until it solved these issues.

Wells Fargo is currently lacking a permanent CEO. We believe that spot will be filled in the next few months. Another headwind is the U.S. yield curve, but over time that should go back to normal. From a valuation point of view, Wells Fargo is very reasonably priced and, given its franchise quality, it could be considered cheap. It has a dividend yield of 3.8 per cent.

Once the temporary issues are resolved over the next two to three years, the bank should reprice to a higher price-to-earnings multiple as its earnings grow. An added benefit is that Berkshire Hathaway is a significant shareholder.

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

NPX makes semiconductors (chips) for a variety of uses, but it specializes in two main areas: driverless cars and connected factories. These 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.

It’s reasonably valued today given its potential growth rate due to the fact that Qualcomm had to abandon its acquisition of NXP in late 2018 as a result of the US-China trade dispute. In a takeover, the main shareholders change from long-term shareholders to arbitrageurs who are looking to make a profit from the deal. Once it’s abandoned, this dynamic goes into reverse. However, there is a mismatch in the time horizon, causing in this case a sizable drop in the stock price. NXP’s price has risen recently as arbitrageurs have moved on.

Qualcomm was willing to pay $127.50 for NXP, whereas today 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’s end markets, its value should continue to grow.