Paul Harris' Top Picks: October 27, 2016

Paul Harris, partner and portfolio manager at Avenue Investment Management

Focus: North American and global equities
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MARKET OUTLOOK
Despite the bouts of volatility we have seen, I think stocks are going to continue to rerate higher. With interest rates remaining low across the world, there is still more relative compensation for being in the stock market than being in the bond market (unless you need fixed income as part of your asset allocation).

The forward earnings yield on the S&P 500 and TSX are still over 5.5 per cent, while bond yields are at 1.16 per cent in Canada and 1.78 per cent in the U.S. I think stocks will rerate higher as the price people are willing to pay for corporate cash flows will continue to increase because of paltry bond yields and volatility being suppressed by central banks.

I think this re-rating of the stock market could happen much sooner if we see any positive earnings momentum in 2017. If we do see a recovery in earnings, I think people are underestimating how quickly the stock market can rerate higher. We believe that this rerating is contingent on central banks continuing to be simulative, economic growth remaining low, and very limited inflation, all of which will keep bond rates low and make the stock market continue to look attractive in relative terms.

TOP PICKS

GILEAD SCIENCES INC. (GILD.O)
Gilead is a pharmaceutical company with drugs for Hepatitis C and HIV. The company trades at 6.5 times earnings and has a dividend yield 2.5 per cent and a free cash flow yield of 13 per cent.

NIKE (NKE.N)
Nike is engaged in the design, development, marketing and selling of athletic footwear, apparel and equipment. It has a great global brand which continues to grow its online presence and its emerging markets revenue. The stock has underperformed as of late and we see this as a good opportunity to purchase the stock; it trades at 25 times earnings and has a 1.16 per cent dividend yield.

KRAFT HEINZ (KHC.O)
Kraft provides food services and food products which include ketchup, Kraft Dinner, etc. The stock has a three per cent dividend yield and trades at 20 times 2017 earnings. We continue to see cost-cutting and organic growth through better distribution of Kraft products through the Heinz distribution network.
 

PAST PICKS: OCTOBER 1, 2015

FIRST SERVICE (FSV.TO)

• Then: $44.00
• Now: $56.32
• Return: +28.00%
• TR: +29.29%

ELEMENT FLEET MANAGEMENT (EFN.TO)

• Then: $17.90
• Now: $13.10
• Return: -8.12%
• TR: -7.51%

DH CORP. (DH.TO)

• Then: $39.74
• Now: $18.03
• Return: -54.63%
• TR: -52.79%

TOTAL RETURN AVERAGE: -10.33%