Stan Wong's Top Picks: Feb. 28, 2019

BNN Bloomberg

Stan Wong , BNN Bloomberg

Stan Wong, director and portfolio manager at Scotia Wealth Management

Focus: North American large caps and ETFs

MARKET OUTLOOK

It certainly has been an eventful time lately for investors. After a sharp correction during the final months of the year, global equities (as measured by the MSCI World Index) have dramatically rebounded and are now only about five per cent away from its earlier highs made in September 2018. Despite ongoing concerns about global economic growth and the pace of corporate earnings, equities have continued a fast and furious rally with last week marking the ninth consecutive week of global stock gains with U.S. stock markets leading the way. Encouraging developments in the U.S.-China trade narrative along with a seemingly more dovish posture by the Federal Reserve Bank has helped fuel stock prices higher. In the United States, the economic backdrop remains solid with manufacturing activity still expanding and consumer spending well supported by a robust labour market. Indeed, the U.S. economic expansion now stands at 116 months old – only five months away from setting a new record.

To note, history indicates that a positive start to the year may help drive further gains for equity markets. Since 1950, when the S&P 500 Index has been higher in each of the first two months of the year, the index has posted positive gains in the final 10 months 92 per cent of the time (25 out of 27 occurrences) with an average gain of 12.1 per cent. From a valuation perspective, the S&P 500 Index currently trades at a 16 times forward earnings multiple – roughly in line with the past two decades. After factoring in low interest rates and inflation, equities appear attractive relative to other asset classes including fixed income. Given the potential for modest multiple expansion this year it is very possible for equities to reclaim its previous highs.

Of course, notwithstanding a constructive intermediate outlook for equities ahead, a near-term pause or consolidation may be on the horizon given the technically overbought condition of equity markets today. As well, downside risks include slowing U.S. corporate earnings growth, uneven global economic growth and geopolitical flare-ups. Although the United States and China may be edging towards a trade resolution, worries are growing that the White House will turn its attention to European automakers shortly thereafter. Rising auto tariffs could be especially damaging to the German economy and the broader European economy.

TOP PICKS

ARK INNOVATION ETF (ARKK.N)

Last bought in January 2019 at $38.

The ARK Innovation ETF is an actively-managed exchange-traded fund that invests in companies relevant to the theme of disruptive innovation. Some of these themes include fintech, cloud computing, autonomous vehicles, robotics, genomic revolution, big data and machine learning, 3D printing and blockchain. Currently the ARK Innovation ETF is highly weighted in U.S. equities, both large and small-cap with the largest sector weightings being health care, technology and communication services. For the more aggressive portion of investor portfolios, ARK has provided investors with an annualized return of over 40 per cent over the past three years – far surpassing the performance of the S&P 500 Index. The expense ratio of this ETF is 0.75 per cent.

DOLLAR GENERAL (DG.N)

Last bought in January 2019 at $113.

With nearly US$24 billion in annual revenues, Dollar General is the largest discount retailer in the U.S., with over 15,000 stores in 44 states. Dollar General offers a broad selection of merchandise including consumables, seasonal, home products and apparel. Over 75 per cent of the company’s revenues are from recurring sales of consumables (that include paper and cleaning products, packaged and perishable food, tobacco, and health and beauty items) which allows for steady revenues and earnings in any economic landscape. Dollar General’s broad network of stores are often located in rural locations and smaller towns, which are areas that are off the radar of other giant mass merchant competitors. DG currently trades at 18 times forecast earnings with a long-term estimated earnings per share growth rate of 16 per cent. The company’s five-year average annual adjusted return on equity (ROE) is over 21 per cent. The shares carry a below market beta and yield a 1.0 per cent dividend and is forecasted to moderately grow over the next several years (historically, the company has grown their dividend by an annual rate of almost 10 per cent over the past three years). Dollar General reports its next quarterly results on March 14.

TJX COMPANIES (TJX.N)

Last bought in December 2018 at $45.

With over US$39 billion in annual revenues, TJX Companies is a leading off-price apparel and home fashion retailer in the U.S., Canada and worldwide. TJX operates over 4,000 stores under retail banners including T.J. Maxx, Marshalls, Winners and HomeSense. The company sells a variety of branded goods, opportunistically buying inventory from a network of over 20,000 vendors worldwide. With a nimble merchandising and distribution network, TJX keeps store inventory fresh, spurring store traffic while minimizing risks associated with fashion trends and changing economic climates. With its off-price retailing platform and last-minute inventory purchasing, TJX can perform better in a climate of economic uncertainty or low demand more so than most other competitors, which is an important consideration as the economic cycle matures. This week, the company reported stellar fourth quarter numbers with same-store sales surpassing analyst expectations. Management further announced an 18 per cent increase in its quarterly dividend and an additional US$1.5 billion stock repurchase program. Over the past five years, TJX investors have enjoyed an average annual dividend growth rate of over 21 per cent. TJX currently trades at 20 times forecast earnings with a long-term estimated earnings per share growth rate of 12 per cent. TJX pays a dividend yield of 1.8 per cent and reports its next quarterly results on May 21.