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

MARKET OUTLOOK

One market anxiety has given way to another as U.S-China trade relations improve and fears around the coronavirus outbreak grow. The disease evokes memories of the SARS epidemic and also the more recent Ebola, Zika and MERS outbreaks. It’s important to note that none of these past epidemics wielded a lasting negative impact on the economy or financial markets.

Earlier this month, North American equity markets yet again reached new all-time highs as investors become less worried about an impending economic recession. Fourth-quarter corporate earnings have also been solid thus far, with 75 per cent of the companies that have already reported beating analyst estimates. Equity valuations are somewhat extended though, with price-to-earnings ratios at the upper range of the past 10 years. This combined with the strong move in stock prices in 2019 and fears over the coronavirus outbreak will likely set the stage for volatility over the near-term. 

In Stan Wong Managed Portfolios, we’re taking a cautious approach towards equities. Yet, we believe that good buying opportunities will present themselves as they always do during times of unsettled markets. We continue to overweight U.S. equities, with our largest sector weightings in communications, healthcare, financials and consumer discretionary. Overall, we prefer companies with high-quality attributes and strong balance sheets (high return on equity, low financial leverage and steady earnings growth). We like defensive growth, low volatility and high-dividend strategies as the global macroeconomic backdrop matures.

TOP PICKS

BOOKING HOLDINGS (BKNG NASD)
Last bought in January 2020 at around $1,870.

With over US$16 billion in expected revenues for 2020, Booking Holdings is the world’s largest online travel agency by revenue, offering booking services for hotel and vacation rooms, airline tickets, rental cars, restaurant reservations, cruises and other vacation packages. The company operates a number of brands including Priceline.com, Booking.com, Agoda, OpenTable and Kayak.

Booking shares are attractively valued, trading at 17-times forecast earnings with a long-term estimated earnings growth rate of about 15 per cent. This gives the shares an estimated price-earnings to growth (PEG) ratio of just 1.1 times. The stock is in oversold territory, down over 10 per cent from its highs earlier this month, representing an attractive buying opportunity. Booking reports its next quarterly results on Feb. 26.

MERCK (MRK NYSE)
Last bought in January 2020 at around $85.

With nearly US$50 billion in expected revenues for 2020 and its products being marketed in over 140 countries, Merck is one of the world’s largest health care companies. It has operations in pharmaceutical, animal health and consumer care. Merck’s core products include treatments for cancer, diabetes and HPV. The company’s wide lineup of high-margin drugs and robust pipeline of new drugs should ensure strong revenue and earnings growth over the long term. Indeed, Merck has reported 23 consecutive quarters of positive earnings surprises.

Merck shares offer investors a defensive growth name with an attractive valuation. The company trades at 16 times forecast earnings, with a long-term estimated earnings growth rate of 10 to 12 per cent. The shares also yield a healthy 2.8 per cent dividend. Merck reports its next quarterly results on Feb. 5. 

STARBUCKS (SBUX NASD)
Last bought in January 2020 at around $85.

With over US$28 billion in expected revenues for 2020 and over 30,000 stores across 80 countries, Starbucks provides investors with an iconic consumer growth story.

This week, the company reported strong first-quarter earnings results that surpassed analyst estimates. However, the stock has declined nearly 10 per cent from highs earlier this month due to the coronavirus outbreak and its effects on the company’s operations in China. While China is highly important to Starbucks’ future, today only 10 per cent of its overall revenue comes from that country. Hence, its vulnerability to the outbreak may not be as severe as some investors think.

Despite its size in North America, Starbucks still has meaningful domestic growth potential, with continued beverage innovation, enhanced mobile and reward initiatives and improved store formats. The stock trades at 27 times forecast earnings, with a long-term estimated earnings growth rate of 12 to 15 per cent. The shares also yield a modest 1.9-per-cent dividend.

PAST PICKS: JAN. 23, 2019

DOLLAR GENERAL (DG NYSE)

• Then: $113.59
• Now: $156.99
• Return: 38%
• Total return: 39%

UNITEDHEALTH GROUP (UNH NYSE)

• Then: $267.02
• Now: $280.98
• Return: 5%
• Total return: 7%

WASTE MANAGEMENT (WM NYSE)

• Then: $94.91
• Now: $122.76
• Return: 29%
• Total return: 32%

Total return average: 26%