Paul Harris' Top Picks: December 29, 2017

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

The global economy is seeing some real improvements, economic data continues to improve, the ISM index is expanding, and we have seen positive readings in retail sales, industrial production, the job market, consumer confidence, and small business confidence. We are also seeing strong earnings growth and topline revenue growth and not the deterioration in margins that some have been expecting. As a result, many of the central banks around the world are looking to slow QE or increase rates. However, we believe we will see low inflation and low interest rates for some time as central banks will not want to run the risk of pushing the economy into a recession. We have a positive view of the global economy but there are several issues that may impact the 2018 outlook:

• The flattening yield curve in the U.S.
• Inflation, which might jump in 2018 as it is unexpected
• Bitcoin
• Retail companies
• China and its battle with the WTO

TOP PICKS

BANK OF AMERICA (BAC.N)
Bank of America 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 stocks trade at 1.2 times book value and 12.0 times 2018 earnings. The company is buying back stock and will be increasing its dividend over the next several years from its present yield of 1.70%. We think the intrinsic value of US$38.

CVS HEALTH (CVS.N)
An integrated pharmacy and health care company. It operates through three segments: pharmacy, long term care, corporate consulting services. The stock trades at 11 times 2018 earnings, has a free cash flow yield of 7.9 per cent and a dividend of 2.00 per cent. The company is in the process of acquiring Aetna, which is a further movement into vertical integration in the health care industry moving away from fee for service to a more value-based care delivery. We believe the acquisition makes sense in an industry that is transforming very quickly and is threatened by Amazon. Although we think that execution of the acquisition is key and there may be bumps along the way, we would see it as a buying opportunity. We think the intrinsic value is US$95.

CENOVUS ENERGY (CVE.TO)
An integrated oil company. The stock has been under pressure due to a recent acquisition. The stock trades at 4.7 times price to cash flow, has an NAV of $17 and trades at a discount to its NAV and has a dividend of 1.8 per cent. We believe the new CEO will rationalize the cost structure and sell non-core assets.

PAST PICKS: DECEMBER 30, 2016

GILEAD SCIENCES (GILD.O)

• Then: $71.61
• Now: $71.96
• Return: 0.25%
• Total return: 3.19%

NIKE (NKE.N)

• Then: $50.83
• Now: $62.68
• Return: 23.31%
• Total return: 24.96%

AUTOCANADA (ACQ.TO)

• Then: $23.12
• Now: $22.70
• Return: -1.81%
• Total return: 0.62%

TOTAL RETURN AVERAGE: 9.59%