Norman Levine's Top Picks: July 4, 2018

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

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MARKET OUTLOOK

If you’re an index ETF or mutual fund owner, or even a closet-index fund owner (most bank-run funds fall under that category, but they’d never admit to it), you haven’t made much money this year in North American stock markets. Finally the active manager has been given the opportunity to outperform, after many years underperforming.

Index funds do best when markets are rising rapidly, as the U.S. market has generally done since March 2009. Active managers generally outperform in slow-rising, flat, down and volatile markets, such as the one we’re beginning to see now. What worries us looking forward are trade wars. Historically, they’ve been disastrous for economies and stock markets when implemented.

So far, what we’ve seen initiated by the U.S. is quite mild and we believe somewhat tied in to the upcoming congressional elections. In response, we have somewhat increased our cash positions on a net basis. Should things become more heated, we’d be inclined to increase our selling in the future. We hope we don’t get to that situation.

TOP PICKS

SCOTIABANK (BNS.TO)
Originally bought on May 3, 2013 at $58.

The Bank of Nova Scotia is Canada’s third largest bank and the country’s most international bank, with major operations in Asia and Latin America. This large international exposure differentiates Scotiabank from all its Canadian peers. Four years ago, it greatly reduced its exposure to mutual funds by selling its stake in CI Funds (a very timely sale, we believe) After biding its time, it has recently been on an acquisition binge, using that capital to increase its presence in institutional (Jarislowsky Fraser) and private client (MD Management) asset management. In addition, it’s made three important banking deals in Chile, Colombia, and most recently, Peru. These acquisitions were all relatively expensive and designed to help shape Scotiabank for the future with long-term payouts. The market has penalized the bank in the near-term and we think that makes it attractive at current levels. The stock yields 4.4 per cent.

NUTRIEN (NTR.TO)
Bought on June 11 at $69.40.

Nutrien is the merged entity of the former Agrium and Potash Corp. It’s a diversified fertilizer/ag retail company with around two-thirds of earnings from fertilizer production and the rest derived from retail farm centres.

It’s our newest position. We like the outlook for both potash (supply/demand is starting to get out of balance) and ammonia/urea (supply appears to be inadequate for the next few years). In addition, Nutrien has a fabulous balance sheet, which gives it lots of opportunities for acquisitions, joint ventures, share buybacks and dividend increases. Analyst estimates appear to be very conservative. The stock currently yields 2.1 per cent.

SANOFI (SNY.N)
Bought on July 7, 2016 at $41.

Sanofi (formerly Sanofi-Aventis) is a French-based multinational healthcare company focused on pharmaceuticals and human vaccines. Like most other drug stocks have experienced, Sanofi recently faced a patent cliff as many of its major drugs came off patent and, also like most other drug companies, its immediate product pipeline is pretty bare. Historically, this is the best time to buy drug stocks to make a lot of money: when nobody wants them. Sanofi has a great balance sheet and is using that money to buy companies with promising new products. It has a number of promising new drugs in early stages of its pipeline and has announced the sale of its European generics business. It’s lost out on some major acquisitions due to its price discipline, but has purchased in recent years Ablynx, Protein Sciences, and Bioverativ. In the meantime, the company is keeping costs in line and the dividend is safe, providing a yield of about 4.7 per cent. It’s for patient investors, not people looking for quick money.

PAST PICKS: JULY 25, 2017

KUEHNE AND NAGEL INTERNATIONAL (KNIN.VX)

• Then: $164.30
• Now: $149.95
• Return: -9%
• Total return: -5%

ARC RESOURCES (ARX.TO)

• Then: $17.46
• Now: $13.59
• Return: -22%
• Total return: -19%

GENERAL ELECTRIC (GE.N)

• Then: $25.44
• Now: $13.37
• Return: -47%
• Total return: -46%

Total return average: -23%