Ross Healy's Top Picks: May 3, 2019

Ross Healy, chairman of Strategic Analysis Corporation and portfolio manager at MacNicol & Associates Asset Management
Focus: North American large caps

MARKET OUTLOOK

Increasingly, this has been a market which does not care what the balance sheet, its quality or its relation to a company’s stock price is. The same goes for price-to-earnings ratios, which have also become irrelevant. The key issue is whether the company “beat” its earnings forecast. If it did, beating its sales forecast is a hyper-nice bonus. “Stories” and “pie-in-the-sky” expectations are two additional drivers of price. This is a momentum-driven market and “value” is a quaint notion from the distant past.

When you put your portfolio to bed each night, remember that it sleeps on a mattress: its book value. When there’s little or no book (no mattress protection), there’s no fundamental support for the price. In my long experience, eventually all prices revert towards book value. When you have a company with an extreme price-to-book ratio, you should have a sense that you also have extreme price risk.

However, the market that we have right now is not interested in that sort of old-fashioned trivia: this is a “new” paradigm and it needs to play itself out. This is the third such “new paradigm” cycle in my 55-year career in the investment business and investor psychology at extremes has not changed one whit. But when will this one end? How will we know?

From my point of view, the valuation parameters of the “master index,” the S&P 500, have remained intact. Based on current balance sheets and the 12-month forward earnings forecast data, the intrinsic value for that index is 3,080. I’m very wary now that the index is getting close to that level, as I’ve never seen the S&P exceed that measure. The short-term bull market “technical floor” is two-and-a-half times its adjusted book value, which currently stands at 2,505 based on the up-to-date reported balance sheets as of last night. A break below that level (if it is confirmed by the NASDAQ, which did not happen during the late-December low for the S&P) would point to much bigger problems for the overall markets. 

Who is coming in at these levels to buy? This is where it gets interesting. The main buyers are the companies themselves through massive share buybacks. One consequence is that there are big bettors against volatility (bets that the market will not go down in any meaningful sense – in fact a record number of them), which suggests that there are risks in this market that are unfathomable.

TOP PICKS

CVS HEALTH (CVS.N)

BETAPRO S&P 500 VIX SHORT-TERM FUTURES ETF (HUV.TO)

CASH

PAST PICKS: JUNE 4, 2018

ATCO (ACOx.TO)

• Then: $38.98
• Now: $45.67
• Return: 17%
• Total return: 22%

SCOTIABANK (BNS.TO)

• Then: $76.91
• Now: $73.41
• Return: -5%
• Total return: 0%

BARRICK GOLD (ABX.TO)

• Then: $16.67
• Now: $16.99
• Return: 2%
• Total return: 3%

Total return average: 8%

WEBSITE: strategicanalysis.ca
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