Apr 4, 2019

Stan Wong's Top Picks: April 4, 2019

BNN Bloomberg

Stan Wong , BNN Bloomberg

Stan Wong, director and portfolio manager at Scotia Wealth
Focus: North American large caps and ETFs

MARKET OUTLOOK

Global equities have staged a dramatic rally thus far in 2019. The MSCI All Country World Index is up more than 13 per cent year-to-date and less than 3 per cent away from its previous all-time highs made in September 2018. Encouraging developments in the U.S.-China trade narrative along with a more dovish posture by the U.S. Federal Reserve Bank has helped fuel stock prices higher. In the U.S., a slowing but still growing economy provides a constructive backdrop. Based on Bloomberg consensus forecasts, U.S. GDP growth is expected to come in at 2.4 per cent for 2019. The U.S. economic expansion is now 117 months old and only four months away from setting a new record. Here in Canada, the consensus forecast is for a more tepid GDP growth rate of 1.5 per cent.

There has been much chatter lately about yield curve inversions. An inverted yield curve environment has often preceded recessions in the U.S. Yet history shows that a yield curve inversion doesn’t immediately spell trouble for stocks or the economy. After the last five inversions of the more reliable 2-year/10-year yield curve, stocks actually performed quite well. Indeed, the S&P 500 Index didn’t peak until an average of 19 months after the inversions and had gained over 22 per cent on average at the peak.

Today, other economic indicators such as manufacturing, labour and the Conference Board’s Leading Index continue to signal an expansionary environment. The major central banks around the world have also turned more dovish, U.S.-China trade talks appear to be progressing and Chinese stimulus measures seem to be having a positive effect. This allows us to believe that a near-term recession could be sidestepped and that the current cycle will be extended.

In Stan Wong Managed Portfolios, we continue to favour U.S. equities over Canadian equities. We also like emerging markets, particularly in Asia as stimulus measures in China help consumption and economic activity in the region. Lastly, we currently have no allocation to the troubled eurozone region. Overall, we prefer companies with high quality attributes (high return on equity, low financial leverage, stable earnings growth) as the global macroeconomic backdrop matures and becomes less certain moving forward. Financials, consumer discretionary, communication services and health care represent our largest sector weightings. Looking ahead, we expect a measured shift to more defensive and lower beta stocks in our portfolio models over the next few quarters. Of course, we continue to advocate an active approach and emphasize stock selectivity while maintaining stop-loss measures amongst other risk-management strategies.

TOP PICKS

BOEING (BA.N)
Last bought in March 2019 around $378.

The recent tragic events and subsequent drop in Boeing’s share price presents a contrarian opportunity for investors to accumulate a solid long-term growth name. The delivery pause in Boeing’s 737 Max program will likely cease by midyear. Software modifications, enhanced pilot training and improved instrumentation are the likely fixes which would be relatively inexpensive. While the profit loss of the delivery interruption and compensation for the victims’ families could climb upwards of US$900 million, Boeing’s solid balance sheet and insurance coverage will keep the company out of any financial risk.

From a longer-term perspective, Boeing’s seven-year order backlog of nearly 5,900 aircraft provides long-term growth visibility. Boeing currently trades at 19 times forecast earnings with long-term estimated earnings per share growth rate of 15 per cent. Currently yielding 2.1 per cent, Boeing has grown their dividend annually by more 26 per cent over the past five years.

COCA-COLA (KO.N)
Last bought in March 2019 around $45.

With nearly US$32 billion in annual revenue, Coca-Cola is the largest non-alcoholic beverage company in the world.

The company’s recent acquisition of U.K.-based Costa Coffee will bolster its presence in the coffee category. The Costa Coffee chain has nearly 4,000 locations and 8,000 coffee vending machines across more than 30 international markets (including 450 locations in China). The acquisition allows Coca-Cola to diversify into the hot beverage market, a fast-growing segment with an addressable market size of US$1.5 trillion. Like Starbucks, Coca-Cola is looking to China to fuel international growth with plans to grow its Costa store count to roughly 1,200 locations by 2022.

Earlier this year, management announced a 2.6 per cent dividend increase (its 56th consecutive annual dividend increase) along with a new stock buyback program of 150 million shares. With its steady and predictable earnings profile, Coca-Cola shares provide investors with an iconic global brand, low relative beta and a strong, growing dividend yield in a maturing economy. The stock currently trades at 22 times forecast earnings with a long-term estimated earnings per share growth rate of 6 per cent.

MANULIFE FINANCIAL (MFC.TO)
Last bought this month around $23.

Manulife is the largest of the three major Canadian life insurers by market capitalization, ahead of Sun Life and Great-West Life. The company markets through the brand name Manulife Financial in Canada and Asia and primarily through the brand name John Hancock in the U.S.

With over 50 per cent of its revenues coming from Asia, Manulife should capitalize on the region’s rapidly growing middle class and continue to achieve consistent double-digit earnings growth over the next few years. This will drive Manulife’s overall top-line growth and further improve geographic diversification. Today, Manulife shares trade at a compelling valuation at 8 times forecast earnings and 1.1 times price-to-book, a discount to its main competitors and its historical 10-year averages. Manulife has a long-term estimated earnings per share growth rate of about 10 per cent. It yields a healthy dividend of 4.3 per cent.