Full episode: Market Call Tonight for Thursday, February 27, 2020
Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs
Investor attention remains dominated by the possible economic impact of the coronavirus epidemic. This week’s news of additional outbreaks outside of China has caused a sharp market sell-off and a flight-to-safety trade, with Treasuries and gold prices moving higher. However, it is important to note that history suggests that COVID-19 (as with SARS, avian flu, MERs, Ebola and Zika) will likely not wield a lasting negative impact on economic and financial markets. Accommodative monetary and fiscal stimulus measures from policymakers around the world will also ease the impact of the crisis.
We believe that the market volatility has presented some attractive buying opportunities. We are taking a barbell approach, with more defensive equities (consumer staples and healthcare) alongside equities that are more cyclical and growth-oriented (consumer discretionary, communications and technology). We prefer U.S. equities geographically along with high-quality, defensive growth and low-volatility strategies. Although we will still likely see a volatile path ahead given the uncertainties of the virus outbreak and the upcoming U.S. elections, we still see equities outperforming bonds and cash over the year ahead.
FACEBOOK INC (FB NASD)
Last bought this week at US$196.
Facebook is the world’s largest online social network, with nearly 2.5 billion monthly active users. Advertising represents more than 90 per cent of the company’s estimated US$70 billion in 2019 revenues. In 2020, Facebook’s revenue is expected to climb to nearly US$86 billion. The Facebook app, Instagram, Messenger and WhatsApp are among the world’s most widely used apps. With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising. Facebook’s ad revenue per user (ARPU) continues to grow, demonstrating the increasing value that advertisers see in working with the company. Facebook is an unquestionable secular growth story, reporting 21 consecutive quarters of positive earnings surprises. The shares look attractive, down about 14 per cent from recent highs, with the current price near its 200-day moving average. The company trades at 22 times forecast earnings with a long-term estimated earnings growth rate of about 22 per cent, giving it an estimated price/earnings-to-growth (PEG) ratio of just 1 times. Facebook reports its next quarterly results on April 24.
NIKE INC (NKE NYSE)
Last bought this week at US$93.
With over US$42 billion in expected revenues for 2020 and an iconic sports brand, Nike is the largest athletic footwear and apparel company in the world. While the coronavirus outbreak may curb Nike’s results over the near term, the company’s long term growth forecast remains very much intact. Although, many Nike stores in China remained closed, the recent launch of the Nike app may provide an alternative to store sales while boosting digital revenue. Nike’s 15-per-cent stock price decline from recent highs appears overdone, with the shares in oversold territory and near its 200-day moving average. Longer term, Nike has tremendous growth prospects in China and other emerging markets. Over the past seven years, Nike has beaten analyst earnings expectations 27 out of 28 quarters. Nike trades at 29 times forecast earnings, with a long-term estimated earnings growth rate of 12 to 15 per cent. The shares also yield a modest 1.1 per cent dividend. Nike reports its next quarterly earnings results on March 24.
ISHARES EDGE MSCI MINIMUM VOLITILITY USA ETF (USMV NYSE)
Last bought this week at US$66.
USMV seeks to track the investment results of an index composed of U.S. equities that, in the aggregate, have lower volatility characteristics relative to the broader market. With the global economic cycle maturing and geopolitical uncertainties rising, an allocation to a low volatility approach as part of an overall portfolio construction is prudent. Over the past three- and five-year periods, USMV has provided investors with lower volatility (standard deviation) and higher returns than the broader S&P 500. Top holdings in this ETF include Coca-Cola, McDonald’s, Waste Management, PepsiCo and Verizon. USMV carries an expense ratio of 0.15 per cent.
PAST PICKS: FEB. 28, 2019
ARK INNOVATION ETF (ARKK NYSE)
- Then: $46.56
- Now: $51.71
- Return: 11%
- Total return: 11%
DOLLAR GENERAL (DG NYSE)
- Then: $118.46
- Now: $157.66
- Return: 33%
- Total return: 34%
TJX COMPANIES (TJX NYSE)
- Then: $51.29
- Now: $60.12
- Return: 17%
- Total return: 19%
Total return average: 21%