Rob Lauzon, managing director and deputy chief investment officer at Middlefield Capital Corporation
Focus: Global stocks

MARKET OUTLOOK

Despite concerns over how the global economy will recover, investors are responding positively to the amount of fiscal and monetary stimulus, the flattening of the curve in several pandemic hot spots and the economic reopening throughout the U.S. and Europe. Notwithstanding the progress made over the last few weeks, we remain cautious due to the uncertainty of economic growth prior to the approval and delivery of a vaccine for COVID-19.

While Chinese economic fundamentals have improved since February, a full recovery is not yet in sight. Cinemas and other businesses that rely on large numbers of customers in close proximity are still struggling. In addition, many consumers are justifiably choosing to save more than spend due to fear of infection and employment uncertainty.

The investment landscape remains challenging. However, we continue to believe that select themes should remain resilient. The work-from-home phenomenon is accelerating trends in cloud adoption and IT outsourcing, benefiting not only software names but also data centre operators and semiconductor manufacturers.

Although equity prices have rebounded, earnings expectations have not, driving a significant increase in broader market valuations. As a result, we continue to exercise caution and patience by focusing on businesses with competitive advantages and strong balance sheets and ample liquidity. We believe these characteristics are critical to sustainable value creation and outperformance over the long term. Tensions with China continue to escalate while the upcoming U.S. election may also act as a headwind to the current market momentum. We believe a short-term pause is likely over the summer months.

TOP PICKS

PEPSICO INC (PEP NASD)

PepsiCo is well positioned to gain market share in snacks following COVID-19, as consumers favor eating in rather than dining out. The company has a strong global brand portfolio (Quaker Oats, Tropicana Juice, Gatorade, Pepsi, Doritos, Frito-Lay). Good relationships with suppliers could lead to more shelf space. Lower “on-premise” beverage exposure than competitors (such as in stadiums, restaurants, theatres) makes it more defensive. Valuation remains attractive. Sum-of-the-parts analysis shows that, excluding snacks, the remainder of the business is a trading at a large discount to peers. We like the 3 per cent dividend yield that has grown annually.

PFIZER (PFE NYSE)

This blue chip health care name has a strong and under-levered balance sheet which will give them potential firepower in an increasingly attractive market for M&A. The platform will be more innovative and higher growth following the divestment of its consumer and Upjohn businesses (we believe the market will re-rate the shares). “Best-in-class” growth prospects are not predicated on major pipeline contributions or acquisitions. Pfizer has a solid earnings base that provides a margin of safety and supports the dividend yield of over 4 per cent.

ENBRIDGE (ENB TSX)

Enbridge has the largest crude oil pipeline network in the world and is the largest natural gas utility in North America by volume. 98 per cent of current EBITDA is supported by contracts and we believe the 7 per cent dividend yield is safe. The company has shown strong resiliency through commodity cycles.

PAST PICKS: AUG. 21, 2019

WESTSHORE TERMINALS (WTE TSX)

• Then: $21.49  
• Now: $15.32
• Return: -29%
• Total return: -27%

AMAZON (AMZN NASD)

• Then: $1823.54
• Now: $2413.83
• Return: 32%
• Total return: 32%

WPT INDUSTRIAL REIT (WIR/U TSX)

• Then: $13.84
• Now: $11.97
• Return: -14%
• Total return: -9%

Total return average: -1%