Richard Croft's Top Picks: August 28, 2017

Richard Croft, president and chief investment officer at R.N. Croft Financial Group

Focus: Options and ETFs
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MARKET OUTLOOK

• Markets are not cheap but valuations reflect decent earnings coupled with low interest rates.
• Washington is providing nothing in the way of stimulus and I have no expectation that that is likely to change. In my view, equity valuations are reasonable despite government inertia. Should the U.S. government come to grips with tax reform, repatriation and infrastructure spending, it could provide additional stimulus.
• Unlikely to see additional interest rate hikes this year which should support equity valuations, although I see no likelihood of PE expansion through the remainder of the year.
• Canada is doing better than expected despite weak energy prices. Any upward momentum in energy would be positive for Canada.
• NAFTA is not likely to have a major impact on Canada. If the U.S. were to walk away, I suspect the U.S. would attempt to structure a bilateral agreement with Canada. 
• U.S. currently at full employment, which should support upward momentum in wages through 2018.

TOP PICKS

AGNICO EAGLE (AEM.TO) – Covered call

• Buy AEM at $59.24
• Sell AEM January 60 calls at $4.20
• Return if exercised*: 8.37%
• Return if unchanged*: 7.09%
• Downside breakeven: $55.04

CANADIAN NATIONAL RAILWAY (CNR.TO) – Covered call

• Buy CNR at $99.32
• Sell CNR January 100 calls at $3.75
• Return if exercised*: 4.46%
• Return if unchanged*: 3.78%
• Downside breakeven: $95.57

MICRON TECHNOLOGY (MU.TO) – Covered call

• Buy MU at US$30.29
• Sell MU January 30 calls at US$3.50
• Return if exercised*: 10.60%
• Return if unchanged*: 10.60%
• Downside breakeven: US$26.79

* Return over five months
 

PAST PICKS: DECEMBER 9, 2016

BANK OF AMERICA (BAC.N)
Buy BAC Jan 25 calls at $0.85
Sell BAC Jan 25 puts at $2.14

• Net per share profit credit: $22.77
• Net per share profit debit: $23.77
• Profit: $1.00
• Percent return: 4.29%

MORGAN STANLEY (MS.N)
Buy MS Jan 45 calls at $3.30
Sell MS Jan 45 puts at $2.30

• Net per share profit credit: $43.15
• Net per share profit debit: $45.94
• Profit: $2.79
• Percent return: 6.47%

ENBRIDGE INCOME FUND (ENF.TO) – Covered Call
Sell ENF April 34 calls at $1.10

• Net per share profit credit: $33.13
• Net per share: $30.90
• Profit: $1.37
• Percent return: 2.60%

TOTAL RETURN AVERAGE: 2.75%