Paul Harris, partner and portfolio manager at Harris Douglas Asset Management
Focus: North American and global stocks

MARKET OUTLOOK

Now that Federal Reserve and the ECB have cut rates and returned to quantitative easing, the normalization of monetary policy seems more distant than a few months ago.

We have seen a phase 1 deal between China and the U.S., the passage of USMCA and Brexit going through. All this should lead to some stability in global markets and the economy. Expect better economic data as we move into 2020 and more investment as corporations have some trade certainty.

Eventually, for stock to continue to rise we will need to see earnings growth and investment spending. The stock market has climbed a wall of worry and disregarded many of the difficult issues facing the global economy. We think this will continue unless we see changes in central bank policy or more trade issues. We expect volatility throughout the year as we move toward the U.S. presidential election in November.

Climate change and ESG investing will come to the forefront of the investment world in 2020. This has a lot of ramifications for the Canadian stock market, given our strong resource base.

TOP PICKS

TD BANK (TD TSX)

Canada’s second-largest bank, TD has developed a strong franchise in the U.S. The sale of TD Ameritrade will allow for further growth south of the border. The stock trades at 1.6 book value, 10.6 times 2020 earnings and has a 4 per cent dividend yield.

LOCKHEED MARTIN (LMT NYSE)

The U.S. defence budget remains at an elevated level while international defence spending continues to rise. Lockheed Martin’s portfolio is well positioned for priority areas such as aircraft modernization and missile defence systems. Overall earnings growth is at the upper end of the peer group (a five-year earnings per share compound annual growth rate of 15 per cent). There are material opportunities in the pipeline, including further block buy deals with for F-35 aircraft with the U.S. Department of Defense, the U.S. Vertical Lift program and multiple prospects for missile defence and weapons systems.

Strong operating cash generation and a pension contribution holiday in 2019 and 2020 following accelerated payments in 2017 due to tax legislation changes will drive cash flow. We think it can generate $18.4 billion of cash from operations over the 2018-2020 period. Lockheed Martin is at the upper end of the peer group for dividend yield. We forecast it rising steadily to 4.1 per cent in 2021.

JOHNSON & JOHNSON (JNJ NYSE)

Johnson & Johnson is the world’s largest and most diverse healthcare company. It has three divisions: pharma, medical devices, and consumer. The stock trades at 16 times 2020 earnings and has a dividend yield of 2.63 per cent.

PAST PICKS: FEB. 13, 2019

BANK OF AMERICA (BAC NYSE)

• Then: $28.70
• Now: $34.47
• Return: 22%
• Total return: 25%

MICROSOFT (MSFT NASD)

• Then: $106.81
• Now: $160.09
• Return: 50%
• Total return: 52%

CN RAIL (CNR TSX)

• Then: $108.15
• Now: $119.51
• Return: 11%
• Total return: 13%

Total return average: 30%