Paul Harris, partner and portfolio manager at Avenue Investment Management
Focus: North American and global equities

MARKET OUTLOOK

The global economy continues to grow. It’s the first time in 10 years that we’re seeing a coordinated growth around the world. We’re also seeing strong earnings growth and topline revenue growth and not the deterioration in margins that some have been expecting. After a volatile first half, the S&P valuation is more reasonable at 17.5 times. Although we see coordinated global growth, we see it at the 2 to 2.5 per cent level with low inflation. The yield curve continues to show moderating long-term growth and inflation. This economic environment bodes well for stocks longer term. In the short term, we may see great volatility as inflation or yields move higher. We would see this as a buying opportunity.

At the margin, we see:

• Higher rates as central banks unwind quantitative easing (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’ll see greater volatility as the market adjusts to the new reality of higher rates and quantitative tightening (QT). 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

FIRSTSERVICE CORP (FSV.TO)

FirstService 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 U.S. in what remains a very fragmented business. Trades at 31 times next year’s earnings and yields 0.70 per cent.

CN RAIL (CNR.TO)

CN is a rail and related transportation business, with 20,000 route miles of track spanning Canada and Mid-America. The stock trades at 18 times 2018 earnings and has a yield of 1.64 per cent.

CVS HEALTH (CVS.N)

CVS Is an integrated pharmacy and healthcare company. It operates through three segments: Pharmacy, long-term care and corporate consulting services. The stock trades at 10 times 2019 earnings, has a free cash flow yield of 8.5 per cent and a dividend of 2.5 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’s transforming very quickly and is threatened by Amazon. Although we think that the execution of the acquisition is key and there may be bumps along the way, we would see it as a buying opportunity. We think the intrinsic value is $95.

PAST PICKS: SEP. 22, 2017

BANK OF AMERICA (BAC.N)

• Then: $25.02
• Now: $28.36
• Return: 13%
• Total return: 15%

CENOVUS ENERGY (CVE.TO)

• Then: $12.69
• Now: $11.69
• Return: -8%
• Total return: -6%

INTER PIPELINE (IPL.TO)

• Then: $24.24
• Now: $21.88
• Return: -10%
• Total return:  -3%

Total return average: 2%

WEBSITE: avenueinvestment.com