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 continues to grow, it is the first time in 10 years we are seeing a coordinated growth around the world. We are also seeing strong earnings growth and topline revenue growth and not the deterioration in margins that some have been expecting. After a volatile last few months valuation are more reasonable at 16.5 times on the S&P. Although we see coordinated global growth we see growth at 2-2.5 per cent level with low inflation. The yield curve continues to flatten which continues to indicate 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 and we would see this as a buying opportunity. 

At the margin we see:

Higher rates as central banks unwind QE
Short term higher inflation but not extreme numbers
Strong earnings growth which can sustain valuations and 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 QT (quantitative tightening). I think the dual effect of higher rates and QT has already made the Fed quite restrictive- more that the Fed funds rate indicates.
I would look at big pullbacks as buying opportunities.

Top Picks

DOLLAR TREE (DLTR.O)
Operates discount variety stores offering merchandise at a fixed price. The company has 14,334 stores in 48 states and in Canada. The stock trades at 14.3 times 2019 earnings, 9.0 EV/ EBITDA and a free cash flow yield of 5.7 percent.

FIRSTSERVICE CORP (FSV.TO)
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 US in what remains a very fragmented business. Trades at 28x next year’s earnings and yields .80 per cent

CVS Health (CVS.N)
Is an integrated pharmacy and healthcare company. It operates through three segments: Pharmacy, long term care, corporate consulting services. The stock trades at 10 times 2018 earnings, has a free cash flow yield of 11.0 per cent and a dividend of 3.4 per cent. The company is in the process of acquiring Aetna which is a further movement into vertical integration in the healthcare 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 maybe bumps along the way we would see it as a buying opportunity. We think the intrinsic value is $95 USD.

Past Picks: April 13 2017

CVS HEALTH (CVS.N)

• Then: $77.96 USD
• Now: $65.02 USD
• Return: -17%
• Total Return: -14%

BLACKSTONE GROUP (BX.N)

• Then: $28.86 USD
• Now: $32.66 USD
• Return: 13%
• Total Return: 24%

BANK OF AMERICA (BAC.N)

• Then: $22.34 USD
• Now: $30.09 USD
• Return: 35%
• Total Return: 37%

Total Average Return: 16%