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

MARKET OUTLOOK

It's way too early to tell, but it’s strange how the markets sold off sharply right after the end of the third quarter, exactly as they did at the end of the third quarter last year. We all know what that looked and felt like. We would keep an extra amount of cash available for investment should this play out as it did a year ago. Also, it would appear interest rates would rather go down than up, so I would hold government bonds (Canada, agency and provincial) in portfolios as well as some P-2 rate straight perpetual preferreds. Owning rate-reset preferreds without a floor has proven to be extremely dangerous in declining rate environments.

TOP PICKS

WELLS FARGO (WFC:UN)
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. In other words, these are temporary issues as opposed to permanent ones. These issues, including the establishing of fake accounts, illegally repossessing cars and selling dangerous investments, lead to congressional and SEC probes. In February 2018, the U.S. Federal Reserve limited Wells Fargo’s growth until it solved these issues.

After a prolonged search, the bank announced that it hired the CEO of Bank of New York Mellon to be its new CEO. The market was quite pleased with this appointment. From a valuation point of view, Wells Fargo is very reasonably priced. Given its franchise quality, it could be considered to be cheaply priced. It has a dividend yield of 4.2 per cent. Once it resolves its issues in over the next two or three years, the bank should re-price to a higher price-to-earnings multiple as its earnings grow. An added benefit is that Berkshire Hathaway is a significant shareholder.

JOHNSON & JOHNSON (JNJ:UN)
Bought on May 17, 2019 at $138.45.

Johnson & Johnson is one of the largest and most diversified healthcare businesses in the world, with over 250 operating companies encompassing a broad range of products across the healthcare field. The company's worldwide business is divided into three main segments: medical devices and diagnostics (around 37 per cent of sales), pharmaceutical (43 per cent), and consumer (20 per cent). Sentiment against healthcare stocks is currently quite negative, something that has caught our attention, as previous bouts of negativity towards the group (especially political negativity) have proven over time to provide excellent buying opportunities. J&J has been hurt by the controversy and litigation over its talc and opioids businesses. We believe the talc litigation is already in the stock and so far, litigation on opioids (keep in mind J&J sold only 1 per cent of all opioids in the U.S.) has been more favourable than expected. What we are looking forward to is new drug approvals beginning in 2020 and the fact that it does not face any type of patent cliff for some time. J&J yields 2.9 per cent.

BROOKFIELD PROPERTY (BPY-U:CT)
Bought on July 19, 2019 at $24.63.

Brookfield Property is a diversified global real estate company that operates across many sectors. It owns, operates and develops one of the largest portfolios of office, retail, multifamily, industrial and hospitality, among others. Last year it completed the purchase of shopping centre giant General Growth Properties in the U.S. and there’s some investor concern regarding Brookfield’s ability to turn the assets around and how long it will take. Also, it was recently taken out of the MSCI indexes due to lower liquidity than what they require. These moves have weighed on the stock, which we believe has presented an excellent opportunity. The stock trades at a discount to its net asset value and its current distribution yield is 6.9 per cent.

PAST PICKS: SEP. 25, 2018

LINAMAR (LNR:CT)

Sold on Dec. 6, 2018 at $47.64.

• Then: $59.16
• Now: $38.22
• Return: -35%
• Total return: -35%

UNI-SELECT (UNS:CT)

Sold on Feb. 25, 2019 at $13.21.

• Then: $22.07
• Now: $10.31
• Return: -53%
• Total return: -52%

NUTRIEN (NTR:CT)

• Then: $74.78
• Now: $64.86
• Return: -13%
• Total return: -10%

Total return average: -32%