Stan Wong's Top Picks: July 4, 2018

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

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MARKET OUTLOOK

At mid-year, global equity markets have continued their largely range-bound pattern as investors evaluate competing tailwinds and headwinds. On the positive side, solid economic data along with strong corporate earnings momentum has been encouraging. But markets have been held back by escalating global trade tensions, a flattening yield curve and the idea of “peak earnings.” Indeed, investors have taken somewhat of a risk-off approach to equities in recent weeks, evidenced by the outperformance of the more defensive equity sectors (utilities, consumer staples, real estate and telecom). Other safe-haven asset classes, including the U.S. dollar and government bonds, have also moved higher. Yet at the same time, decent global economic data along with strong earnings momentum, corporate tax cuts and fiscal stimulus in the U.S. has provided a very supportive backdrop.

Equity markets clearly appear to be nearing a critical juncture. An eventual easing of trade tensions would allow for stocks to break out to the upside. On the other hand, a recipe of overly tight monetary conditions and unexpected inflation increases along with additional trade skirmishes could alternatively result in a breakdown in stock prices. We take a cautious-but-constructive approach to the current scenario. Ultimately, a full-scale trade war is in no party’s interest and it would stand to reason that eventual trade agreements will come to pass. Yield curve fears also appear somewhat premature. Fundamental and technical views of the equity markets remain promising, giving us the viewpoint that equities will outperform fixed income investments in the intermediate term. 

In Stan Wong Managed Portfolios, we’re most heavily weighted towards the financial, technology and consumer discretionary sectors while underweight defensive areas such as consumer staples, real estate and utilities. We favour high quality, growth and momentum approaches to equities. As well, dividend growers should continue to outperform dividend payers as interest rates continue their upward trends. When looking at geographic regions, we mainly prefer the U.S. along with Asia (emerging and developed) over other areas. On balance, we see global equity markets outperforming fixed income markets in the intermediate term. Lastly, as the economic cycle matures, we do anticipate more volatility ahead and stress the importance of stock and sector selectivity.

TOP PICKS

AMERICAN EXPRESS (AXP.N)
Last bought in April 2018 at around US$91.

American Express is a global payment and travel company. Its competitive advantages (its reputation for superior service, a network of attractive customers and merchants and a strong corporate business vision) remain solid. Longer term, as global consumer spending grows and the secular trend of digital currency overtaking cash and cheques continues, American Express will continue to grow its sales and margins.

Last week, the company announced the launch of a co-branded credit card with Amazon, targeting small businesses. American Express also passed the Fed financial stress tests, with management announced a $3.4 billion share buyback plan along with an 11 per cent increase in the company’s quarterly dividend. Its shares currently trade at a forward price-earnings multiple of 13 times with a forecasted long-term earnings per share growth rate of 12 per cent. American Express reports its next quarterly results on July 18.

RESTAURANT BRANDS INTERNATIONAL (QSR.TO)
Last bought in May 2018 at around C$70. 

Restaurant Brands International is one of the world’s largest quick-service restaurant companies with over 24,000 locations in more than 100 countries and territories. The company operates through three restaurant segments: Tim Hortons, Burger King and Popeye’s Louisiana Kitchen. Longer term, management strategy includes plans to improve brand awareness and guest experience, exploit digital initiatives for customer acquisition and marketing purposes, and bolster international expansion.

Recent softness in the share price provides investors with an attractive, longer-term buying opportunity in a high-quality, high return-on-equity stock. The shares currently yield a 2.9 per cent dividend and trade at a forward price-to-earnings multiple of 23 times. The company is forecasted to grow its earnings by a long-term annualized rate of 15 per cent, providing investors with an exceptional combination of capital growth potential and steady income. Restaurant Brands International reports its next quarterly results on July 26.  

IQIYI (IQ.O)
Last bought this month at around US$33.

Often referred to as the “Netflix of China” and recently spun off from its parent company Baidu (which itself is often referred to as the “Google of China”), iQiyi provides online video entertainment services (movies, television dramas, variety shows and other content) to its subscribers in China. Subscribers have grown from 10 million in 2015 to over 60 million today: nearly half that of Netflix globally.

iQiyi’s content includes over 70,000 titles (much of which is original content, which is similar to Netflix’s approach). Indeed, iQiyi signed a licensing and partnership deal with Netflix last year allowing subscribers access to some Netflix original content. It’s also formed partnerships with JD.com, Tencent Holdings and Alibaba. The company’s main sources of revenue are online advertising and subscription services. While the company isn’t yet profitable today and the future share price movements are expected to remain highly volatile, iQiyi’s growth runway is undeniable, with China already being the world’s largest streaming market and more than 40 per cent of the country's population yet to connect to the Internet. iQiyi reports its next quarterly results on August 15.

PAST PICKS: JUNE 29, 2017

CITIGROUP INC (C.N)

• Then: $66.98
• Now: $66.06
• Return: -1%
• Total return: 0.4%

COSTCO WHOLESALE (COST.O)
Sold in January 2018 at $192.

• Then: $158.68
• Now: $207.12
• Return: 31%
• Total return: 32%

TENCENT HOLDINGS LTD (TCEHY.PK)

• Then: $35.83
• Now: $49.47
• Return: 38%
• Total return: 38%

Total return average: 23%