Full episode: Market Call for Tuesday, July 21, 2020
Paul Harris, partner and portfolio manager at Harris Douglas Asset Management
FOCUS: North American and global stock
First, I would like to say that nobody knows what is going to happen amid the lockdown, but afterwards everyone will be able to explain it. My big fear is that governments, medical experts and media were supposed to scare people but they have terrified them, which means that normal is going to take longer than we think. We have had a V-shaped recovery in the stock market, but economic recovery will take longer.
One thing we do know is that great companies will persist. If you owned a mediocre business heading into this pandemic, it is unlikely that it will be a better business after COVID-19. We buy high-quality companies that offer a high margin of safety. These companies have high and growing returns on capital, pricing power that is improving over time, growing free cash flow, strong balance sheets with flexibility to take on debt and are asset-light. These are businesses that do not require significant ongoing capital expenditures to make a product or service. We continue to believe that technology, healthcare, consumer staples and discretionary like Amazon, Costco and Walmart will continue to do well. Retail, oil and gas and resources will perform poorly. Every crisis is different and unanticipated outcomes are guaranteed; therefore, I would advise caution and patience.
Stryker Corporation (SYK NYSE)
Stryker is one of the world’s leading medical technology companies. The company offers innovative products and services in orthopaedics, medical and surgical, neurotechnology and spine. With the acquisition of Wright Medical, they will have products for hands and ankles; these products help improve patient and hospital outcomes.
The company has 73 per cent of its business in the U.S., 21 per cent international (developed markets) and 6 per cent in emerging markets. This is a great demographic play: as the population ages, Stryker’s products become more useful. Furthermore, there is somewhat of an annuity with med tech products, as once surgeons learn they tend not to change. Stryker is a well-diversified company, and with its strong balance sheet should be able to manage through any macroeconomic pressures. It’s generating nearly $2.6 billion of free cash flow in 2021 of which about 25 per cent is being used for dividends. This still leaves the majority of its annual free cash flow that could be used for M&A and paying down debt. They cover their interest payments 11.4 times and have a high free cash flow conversion rate.
Amadeus IT Group SA (AMADY OTC)
Amadeus is a Spanish company engaged in the provision of information technology services, primarily for the tourism and travel industries. Their distribution division offers Global Distribution System (GDS), a worldwide computerized reservation system (CRS) used by travel agencies and travel management for booking airline seats, hotel rooms and other travel-related services. The IT solutions division technology solutions that automate core processes for travel providers. Its customers include full service carriers and low-cost airlines, hotel managers, rail operators, cruise and ferry operators, travel insurers and car rental companies, among others. Amadeus has a yield of 1.3 per cent, covers its interest payments 16 times, converts 95 per cent of free cash flow and is expected to have $800 million in free cash flow in 2021.
FirstService Corp (FSV NASD)
FirstService focuses on residential property management and services like California Closets. It has room to grow market share in the U.S. in what remains a very fragmented business. The company has grown through acquisitions and organic growth. Trades at 30 times next year’s earnings and yields 0.60 per cent.
PAST PICKS: AUGUST 15, 2019
Bank of America (BAC NYSE)
- Then: $26.25
- Now: $23.99
- Return: -9%
- Total Return: -6%
Walt Disney (DIS NYSE)
- Then: $133.41
- Now: $119.48
- Return: -10%
- Total Return: -10%
Novo Nordisk ADR (NVO NYSE)
- Then: $50.74
- Now: $68.56
- Return: 35%
- Total Return: 38%
Total Return Average: 7%