Paul Harris' Top Picks: Aug. 30, 2018

Paul Harris, partner and portfolio manager at Avenue Investment Management
Focus: North American and global equities

MARKET OUTLOOK

The global economy continues to grow. It’s the first time in 10 years we’re seeing a coordinated growth around the world. We’re also seeing strong earnings growth and top line revenue growth and not the deterioration in margins that some have been expecting. After a volatile first half, valuations are more reasonable at 17.5 times on the S&P. Although we see coordinated global growth, it will be at the 2 to 2.5 per cent level with low inflation. The yield curve continues to flatten, which indicates moderating long-term growth and inflation. This economic environment bodes well for stock longer term. In the short term, we may see great volatility as inflation or yields move higher. We would see this as a buying opportunity.

At the margin, we see:

• Higher rates as central banks unwind quantitative easing (QE).
• Short-term higher inflation, but not extreme numbers.
• Strong earnings growth, which can sustain valuations. We see targets increase for the S&P and TSX.
• We will see greater volatility as the market adjust to the new reality of higher rates and quantitative tightening (QT). I think the dual effect of higher rates and QT has already made the Fed quite restrictive — more than what the Fed funds rate indicates.
• I would look at big pullbacks as buying opportunities.

TOP PICKS

BANK OF AMERICA (BAC.N)

Bank of America is one of the largest banks in the U.S., holding 10 per cent of all deposit 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 1.28 times book value and 10.5 times 2019 earnings. The company is buying back stock and will be increasing its dividend over the next several years from its present yield of 1.92 per cent. We think it has an intrinsic value of $50.

CN RAIL (CNR.TO)

Canadian National Railway is a rail and related transportation business with 20,000 route miles of track spanning Canada and Middle America. The stock trades at 18 times 2018 earnings and has a yield of 1.64 per cent.

FIRST SERVICE CORP (FSV.TO)

First Service was recently spun out of Colliers International. The company focuses on residential property management and services. It has room to grow market share in the U.S. in what remains a very fragmented business. Trades at 35 times next year’s earnings and yields 1 per cent.

PAST PICKS: JUNE 22, 2017

AUTOCANADA (ACQ.TO)

• Then: $18.00
• Now: $12.85
• Return: -29%
• Total return: -27%

CVS HEALTH (CVS.N)

• Then: $77.22
• Now: $74.53
• Return: -3%
• Total return: -0.1%

BLACKSTONE GROUP (BX.N)

• Then: $33.06
• Now: $36.89
• Return: 12%
• Total return: 21%

Total return average: -2%

WEBSITE: avenueinvestment.com