Paul Harris, Partner and Portfolio Manager at Avenue Investment Management
FOCUS: North American and Global Equities

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MARKET OUTLOOK:

Just a year ago, the world economy seemed trapped in a cycle of low growth and inflation. Markets recoiled at the possibility that the Federal Reserve would raise rates. Now interest rates and inflation forecast have risen and the market is shrugging off the possibilities of further Fed rate increases. Much of the optimism in the market is driven by expectations of corporate tax cuts and deregulation. However, there is also some real improvements in the global economic data, for example the ISM index is expanding, we have seen positive readings in retail sales, industrial production, employment in the U.S., Europe, and Canada, consumer confidence and small business confidence. The earning season has also been more positive than expected with Revenue growth at 6.0 per cent and stronger earnings. We do not see the ingredients for a dramatic fall in the stock market or a recession.

Top Picks:

CVS Health (CVS.N)

CVS Health is an integrated pharmacy and healthcare company. It operates through three segments: Pharmacy, Long Term Care, Corporate consulting Services. The stock trades at 13 times 2017 earnings, has a free cash flow yield of 7 per cent and a dividend of 2.57 per cent. The stock has had poor same store sales over the last few quarters but we are seeing an improvement and stabilization of margins. We think the intrinsic value is 95 dollars.

Blackstone Group (BX.N)

Blackstone Group is a private equity firm, the stock trades 10 times earnings and a 8 per cent dividend yield. We believe that this is a great environment for private equity firms at they can harvest many of the investment they have made over the last several years. They raised 100 billion which can be used if the market does poorly. We think the intrinsic value of the company is around 60 dollars.

Bank of America (BAC.N)

Bank of America is one of the largest banks in the United States holding 10 per cent of all deposit 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 13.6 per cent. The stock trades at 91 times book value and 11 times 2017 earnings. The company is buying back stock and will be increasing its dividend over the next several years from its present yield of 1.6 per cent and should be from some proposed regulation changes. We think the intrinsic value of 38 dollars.

Past Picks:  JUNE 16, 2016

Kraft Heinz (KHC.O)

• Then: $85.28
• Now: $90.39
• Return: +5.99%
• TR: +8.19%

Potash Corp. (POT.TO)

• Then: $21.45
• Now: $23.02
• Return: +7.31%
• TR: +10.93%

Bayerische Motoren Werke AG (BMW.AG)

• Then: €68.30
• Now: €87.65
• Return: +28.33%
• TR: +28.33%

Total Return Average: +15.81%

Company Website: www.avenueinvestment.com