Stan Wong's Top Picks: April 6, 2017

Stan Wong, director and portfolio manager at Scotia Wealth Management

Focus: North American large caps and ETFs
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MARKET OUTLOOK
North American equity markets appear to have stalled in recent weeks as investors digest political uncertainties in the U.S. and abroad. Policy setbacks in the U.S. and continued concerns over the United Kingdom’s exit from the European Union has caused equity markets to bounce sideways. Not unlike the children’s popular board game of Snakes & Ladders, investors have enjoyed a long period of climbing ladders but have once again become uneasy of potential snakes on the horizon. Indeed, major North American indices are trading at somewhat worrisome valuations with the S&P 500 carrying an 18x forward price-earnings multiple and the TSX at a 17x forward price-earnings multiple.

Nonetheless, the prospects of President Trump’s pro-growth agenda of tax reform, deregulation and infrastructure stimulus remain supportive of equity prices beyond the near-term. That being said, the uncertainty of the timing and implementation of these pro-growth policy measures has undoubtedly caused some recent market trepidation and will continue to do so from time to time in the future. Given an environment in which global economic growth and inflation are higher over the next 12 to 18 months, we remain constructive on cyclical equities (financials, technology and industrials) while underweight defensive stocks and traditional government bonds.   

In Stan Wong Managed Portfolios, we also generally favour value stocks over growth stocks and expect dividend growers to outperform dividend payers. We prefer U.S. equities (and the U.S. dollar) over Canadian equities. Outside of North America, international equity markets are looking attractive from a relative valuation perspective. Of course, we expect volatility to be a more constant theme going forward in 2017 and beyond. As such, we believe that an active portfolio management approach with risk controls (including stop-loss strategies) will be essential to navigating the snakes and ladders ahead.

TOP PICKS

CITIGROUP (C.N) – Last bought in September 2016 at approximately US$48
Citigroup is a diversified financial services holding company that provides a broad range of financial services to consumer and corporate customers in over 160 countries. In the intermediate term, Citigroup shares look to benefit from rising interest rates and a lighter regulatory environment. Citigroup’s potential for large capital returns also makes the shares attractive. Indeed, the company recently announced (in November 2016) a $1.75-billion increase to its share buyback program. The company is recapitalized and appears refocused under new management. Citigroup’s recent co-branding deal with Costco (in the U.S.) has fared very well and should add to earnings results. Longer term, valuation looks compelling with a price-to-book ratio of 0.8x, a significant discount to its peer group.

VISA INC. (V.N) – Last bought in January 2016 at approximately US$73
Visa dominates the global market for electronic payments, accounting for about 50 per cent of all credit card transactions and an even higher percentage of debit card transactions. Today, Visa boasts nearly 2.5 billion credit and other payment cards in circulation across more than 200 countries. As consumer spending around the world grows and digital currency continues to take market share from cash (and cheques), Visa should continue to thrive over the long term as an effective toll booth on global consumer spending. The recovering global economy, along with the company’s acquisition of Visa Europe and its new partnership with Costco, will help results in the near-term while the global secular shift to electronic payments will push results longer-term. Last summer, Visa authorized a new $5 billion share repurchase program, reflective of management’s commitment of returning excess cash to shareholders. Visa shares trade at a 25x forward price-earnings multiple and an estimated long-term earnings per share (EPS) compound annual growth rate (CAGR) of about 17 per cent.

SPDR EURO STOXX 50 ETF (FEZ.P) – Last bought this month at approximately US$36
The SPDR Euro Stoxx 50 ETF tracks the performance of the Euro Stoxx 50 Index — an index of some of the largest companies in Europe (excluding the U.K.). Against the backdrop of improving global economic growth, global reflation, a weak Euro currency and a bottoming of European corporate earnings, Eurozone equities appear undervalued relative to broader North American indices. The Euro Stoxx 50 Index currently trades at a 15x forward price-earnings multiple and a price-to-book multiple of 1.6x. Conversely, the S&P 500 Index trades at an 18x forward price-earnings ratio and a price-to-book ratio of 3.0x. Moreover, the Euro Stoxx 50 Index carries a dividend yield of 3.4 per cent compared to the S&P 500 Index’s dividend yield of two per cent. We also see improvement in the Euro Stoxx 50 Index from a technical perspective with price action breaking above previous resistance levels and long-term moving averages pushing higher. Top holdings in the SPDR Euro Stoxx 50 ETF include Bayer AG, Anheuser-Busch Inbev SA/NV, Allianz SE, Uniliver NV and Daimler AG.
 

PAST PICKS: FEBRUARY 24, 2016

ALPHABET (GOOGL.O)

• Then: $720.90
• Now: $845.09
• Return: +17.22%
• TR: +17.22%

CONSTELLATION BRANDS (STZ.N)

• Then: $139.08
• Now: $171.77
• Return: +23.50%
• TR: +24.75%

ROGERS COMMUNICATION (RCIb.TO)

• Then: $49.81
• Now: $59.40
• Return: +19.25%
• TR: +24.76%

TOTAL RETURN AVERAGE: +22.24%