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

MARKET OUTLOOK

We believe that equity markets should perform well into the end of 2019. However, we do have some concerns over stock price weakness over the short term. The market is likely to be shaken by growth slowdown and we’re definitely seeing evidence of slower growth around the world.

The trade issues with China and the U.S. can certainly increase volatility in the market. The issues have put most of the central banks on hold and we should see no interest rate hikes in 2019. We’d use the opportunity to buy names we like.

I believe the bond market is a better predictor that the stock market and bonds seem to concur with expectations of slower growth and weak inflation. But if earnings can continue to meet estimates, we should see a stronger equity market.

TOP PICKS

LOCKHEED MARTIN (LMT.N)

The U.S. defence budget remains at an elevated level and international defence spending continues to rise. Lockheed Martin’s portfolio is well positioned for priority areas such as aircraft modernisation and missile defence systems.

Overall earnings growth is at the upper end of the peer group (a five-year EPS CAGR of 15 per cent). There are material opportunities in the pipeline, including further block buy deals with the U.S. Department of Defense for F-35 aircraft, the U.S. Vertical Lift programme and multiple domestic and international 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 the company 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 from 3.2 per cent in 2019 to 4.1 per cent in 2021).

VISA (V.N)

Visa is like a toll both: when you use its cards, the company gets 0.15 basis points per transaction (and it processes over 65,000 transactions per second). Today, close to $17 trillion consumer transactions are still done in cash, so the company has good organic growth ahead internationally.

Visa still has growth in the business-to-business market, especially with loyalty programs. We think we will see acceleration in revenue growth into the teens driven by an improving macro backdrop, successful competitive changes around pricing and faster-than- anticipated consumer payment innovations such as in mobile payments.

This is a long-term, secular-driven stock that should provide solid organic growth with opportunities for margin expansion. Visa will make $12.6 billion in free cash flow in 2019.

DISNEY (DIS.N)

Disney is a diversified multinational mass media and entertainment conglomerate. Its Fox asset purchased along with its new streaming service make it one of the best competitors to Netflix. Disney’s film library is by far the best in the industry and spans all age groups. Of its $60 billion in revenue, 41 per cent comes from parks, 36.5 per cent from media and the remainder from consumer and studio entertainment. Disney will generate $9 billion in free cash flow this year.

PAST PICKS: JULY 19, 2018

DOLLAR TREE (DLTR.O)

• Then: $87.49
• Now: $109.08
• Return: 25%
• Total return: 25%

FIRSTSERVICE (FSV.O)

• Then: $103.48
• Now: $129.06
• Return: 25%
• Total return: 26%

CN RAIL (CNR.TO)

• Then: $114.23
• Now: $123.51
• Return: 8%
• Total return: 10%

Total return average: 20%

WEBSITE: harrisdouglas.com