Rick Stuchberry, portfolio manager at Wellington-Altus Private Wealth
Focus: Canadian Large Caps and International ADRs

_______________________________________________________________

MARKET OUTLOOK

We think “sell in May and go away” remains short-sighted. There’s a lot of value in the market, even in the sectors with such great performance. The secular growth trend in the disruption stocks and digital innovators is still early. You can add to that the fact that these companies generally have terrific balance sheets that make them immune to rising rate environment. As an example, when we first bought Facebook, it grew at 35 per cent year-over-year; it’s grown at over 50 per cent for nearly two years. Amazon was growing at 30 per cent when we bought it; now it’s growing at 40 per cent. These companies have accelerated growth.

The recent political skirmishes will certainly cause short-term moves in the markets, but it’s important to note how little it impacts our companies. Tariffs and trade war issues only affect things that are actually produced and consumed. Most of our holdings don’t produce tangible goods and are only services, which makes them unlikely to be affected by tariffs. 

We believe the market is still in the process of completing the January correction. At six months long, it’s a proper correction in our eyes. This secular bull market has been led higher by technology companies and the NASDAQ broke out to new highs in June only to correct down to the old highs. It wouldn’t be surprising to see the main markets take a few more months and join to the upside. That said, it’s very possible for the lagging markets to pull the leaders down with them, but we don’t think it is as likely a scenario. As we’ve said before, the economy remains strong, we don’t think the tax cuts are fully priced into markets and longer-term demographics are looking very good for consumption.  We just had a 10 per cent equity market correction, and have yet to break out higher in major markets.

Our strategy remains unchanged, and in this correction, we’re going to hold much more cash than usual to prevent any kind of stress knowing we have at least a year of cash flow in client accounts. Second, we will continue to add selectively to financials, technology and strong balance sheet stocks in order to safely navigate this transitionary period as global bond markets must normalize over the next one to three years. Once complete, we should be able to safely add some income securities to enhance our cash flow.

TOP PICKS

CARDINAL ENERGY (CJ.TO)

A little over a year ago, Cardinal Energy had just purchased the Canadian assets of an American firm exiting Canada. It was a large transaction that brought in a lot of leverage and stressed out shareholders. A year later, Cardinal has significantly reduced its debt. When its oil hedges expire it should see significantly increased cash flow. In the meantime, investors get paid 9 per cent, which is very sustainable to sit and wait. We like that cash flow when owning an energy company.

ING GROEP (ING.N)

We think owning ING is a low-risk way to get European banking exposure. It has a solid franchise with a leading online banking platform, a growing dividend, and operates primarily in northern European countries with much lower exposure to bad debts. It plans to grow its dividend every year until 2020.

SCOTIABANK (BNS.TO)

Investors seem to be shying away from Canadian banks, while attempting to allocate outside of Canada, and we think this can be done easily without any foreign exchange by owning Scotiabank.  Investors get a 4.3 per cent dividend, a very solid Canadian banking franchise, and great management that will do deals like MD Management’s purchase.

PAST PICKS: AUG. 24, 2017

DEUTSCHE BANK (DB.N)

• Then: $16.28
• Now: $12.08
• Return: -26%
• Total return: -25%

TWILIO (TWLO.N)

Took a minor profit in Twilio (sold about 20 per cent of our shares). We bought it at between $25 and $30. When the stock hit $53, we took a bit of cash profit. We still own a large position in the name and are very positive on the company. Internally, we thought it would be our next Shopify.

• Then: $29.32
• Now: $63.96
• Return: 118%
• Total return: 118%

HOME DEPOT (HD.N)

• Then: $148.25
• Now: $200.97
• Return: 36%
• Total return: 39%

Total return average: 44%