Paul Harris, partner and portfolio manager at Avenue Investment Management

Focus: North American and global equities
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MARKET OUTLOOK
Just a year ago, the world economy seemed trapped in a cycle of low growth and inflation. Markets recoiled at the possibility that the Federal Reserve would raise rates. Now interest rates and inflation forecasts have risen and the market is shrugging off the possibilities of further Fed rate increases. Much of the optimism in the market is driven by expectations of corporate tax cuts and deregulation. However, there are also some real improvements in the global economic data. For example, the ISM index is expanding and we have seen positive readings in retail sales, industrial production, consumer confidence and small business confidence, and employment in the U.S., Europe and Canada. We have created cash in the last few months in the hopes of a pullback, which we view as a buying opportunity as we move into earnings season. We do not see the ingredients for a dramatic fall in the stock market or a recession.

TOP PICKS

CVS HEALTH (CVS.N) is an integrated pharmacy and health-care company. It operates through three segments: pharmacy, long-term care and corporate consulting services. The stock trades at 13 times 2017 earnings, has a free cash flow yield of seven per cent and a dividend of 2.57 per cent. The stock has had poor same-store sales over the last few quarters but we are seeing an improvement and stabilization of margins. We think the intrinsic value is $95.

BLACKSTONE GROUP (BX.N) is a private equity firm. The stock trades at 10 times earnings and has a 5.16 per cent dividend yield. We believe that this is a great environment for private equity firms as they can harvest many of the investments they have made over the last several years. They raised $100 billion, which can be used if the market does poorly. We think the intrinsic value of the company is around $60.

BANK OF AMERICA (BAC.N) is one of the largest banks in the United States holding 10 per cent of all deposits in the country. The bank continues to reduce cost through reduction in headcount and technology. The company continues to improve its capital base with Tier 1 ratio at 13.60 per cent. The stock trades at 0.91 times book value and 11 times 2017 earnings. The company is buying back stock and will be increasing its dividend over the next several years from its present yield of 1.6 per cent, which should result from some proposed regulation changes. We think the intrinsic value of $38.
 

PAST PICKS: MAY 5, 2016

POTASH CORP. (POT.TO)

• Then: $20.60
• Now: $22.06
• Return: +7.08%
• TR: +10.69%

FIRSTSERVICE CORP. (FSV.TO)

• Then: $57.92
• Now: $79.68
• Return: +37.56%
• TR: +38.83%

APPLE (AAPL.O)

• Then: $93.24
• Now: $141.05
• Return: +51.27%
• TR: +53.53%

TOTAL RETURN AVERAGE: +35.35%