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

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MARKET OUTLOOK

Since my last Market Call appearance in mid-April, oil has moved the Toronto market modestly higher while U.S. markets are essentially flat and European and Asian markets (as defined by EAFE) are modestly lower. In other words, there hasn’t been a lot of movement in share prices around the world. This lack of movement in major exchanges (which are dominated in the U.S. by a few high-flying tech companies and in Canada by banks and energy stocks) has finally allowed smaller-cap and special situation stocks to finally have a chance to move upward while the larger-cap stocks trade essentially sideways.
In Canada, all eyes are focused on two major things at present. The first is the Ontario election; it's fair to say that Canadian markets and the loonie will react poorly to an NDP government in Ontario, should it be the result of next week’s provincial election. The second is the Kinder Morgan pipeline; the feds taking ownership of said pipeline will be viewed quite negatively. This makes having a good representation of non-Canadian stocks and Canadian stocks with large foreign operations critical at this time.

OPEN TEXT (OTEX.TO)
Bought originally at $26.18 and bought again on Oct. 13, 2017 at $42.12 and continue to buy for new clients.

Open Text is the largest enterprise software company in Canada and is a consolidator in that business. Their software helps large businesses organize their information, both storing and retrieving. For example, Open Text’s software can assist in organizing customer communication for salespeople. For an industrial company, it can help organize workflow (how work and information move from one person to the next).

The company is an industry consolidator and grows largely through acquisition. The stock had been a laggard in the technology group due to concerns over its ability to properly digest its recent acquisitions. The latest earnings report shows that the integration is going better than expected and significant margin improvement will lead the way to significant cash flow generation that will beat estimates. The stock currently yields 1.8 per cent. We continue to see a growing base of recurring revenue through M&A, expanding operating leverage and developing organic growth that’s not priced into the stock.

BB&T CORP (BBT.N)
We've owned this stock for a number of years and are currently buying for new clients.

BB&T is a regional consumer bank headquartered in North Carolina and operating largely along the U.S east coast. While it will be a beneficiary of higher interest rates, it earns approximately 60 per cent of its earnings from its loan book, which works on spreads rather than actual rates. This book is growing at above-average rates due to its geographic position in states that are among the fastest growing in the U.S. In addition, the bank has made a few acquisitions of smaller regional banks which will enhance growth in revenues and earnings. We currently prefer U.S. banks to Canadian banks on a valuation and risk basis. BB&T's current yield is 2.7 per cent and we expect its dividend to continue to grow at regular intervals at a rate well above the industry average.

PAST PICKS: JUNE 16, 2017

GORMAN-RUPP (GRC.N)

• Then: $27.15
• Now: $33.25
• Return: 22%
• Total return: 24%

POWER FINANCIAL (PWF.TO)
Sold on April 2 at $31.98.

• Then: $33.16
• Now: $32.19
• Return: -3%
• Total return: 2%

PFIZER (PFE.N)

• Then: $32.97
• Now: $35.47
• Return: 8%
• Total return: 12%

Total return average: 13%