May 19, 2016

Stan Wong's Top Picks: May 19, 2016

Michael Chu, BNN Bloomberg

Stan Wong , BNN

Stan Wong, director & portfolio manager at Scotia Wealth Management

FOCUS: North American Large Caps and ETFs.

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MARKET OUTLOOK:

After a sharp rally from the January/February lows, North American equity markets are showing signs of fatigue. Valuations appear somewhat extended with both the S&P 500 and TSX indices trading at about 17/18x forward price-earnings multiples, a premium to the 10-year average of about 14/15x forward price-earnings multiples for both indices. From a technical perspective, the 2,100 level (an area of overhead supply) remains as upside resistance for the S&P 500 Index while the 14,000 level appears to be an area of overhead resistance for the TSX. Near-term market anxieties include a sluggish corporate earnings picture, anemic global economic growth, geopolitical tensions, an uneasy U.S. political backdrop and of course, the timing of Federal Reserve interest rate hikes. Given this setting, North American equity markets will likely remain rather bumpy and range bound in the coming months ahead. Indeed, we will need a robust rebound in corporate earnings to provide a catalyst for equity prices to advance meaningfully higher. In Stan Wong Managed Portfolios, we currently prefer large-cap, high quality North American companies with strong balance sheets, reliable earnings streams, growing dividends and lower beta attributes. As we move into the late cycle phase of the economy/stock market, we continue to believe that today’s market environment requires active portfolio management with tactical stock selection and defensive risk controls including stop loss strategies.

General Equity Market Comments (for discussion only on the show)

North American equity markets are showing signs of fatigue.

Valuations appear somewhat extended with both the S&P 500 and TSX indices trading at about 17/18x forward price-earnings multiples, a premium to the 10-year average of about 14/15x forward price-earnings multiples.

From a technical perspective, the 2,100 level (an area of overhead supply) remains as upside resistance for the S&P 500 Index while the 14,000 level appears to be an area of overhead resistance for the TSX.

Near-term market anxieties include a sluggish corporate earnings picture, anemic global economic growth, geopolitical tensions, an uneasy U.S. political backdrop and of course, the timing of Federal Reserve interest rate hikes.

Given this setting, North American equity markets will likely remain rather bumpy and range bound in the coming months ahead.

Market sentiment could be tested in the coming months with a seasonally weaker period for equities, the U.K. referendum in June and the U.S. Republican convention in July.

From a technical perspective North American equity markets appear to have run into some near-term upside resistance with the S&P 500 Index stalling as it approaches the 2,100 level (an area of overhead supply) and the TSX at the current downward sloping 200-day moving average level.

In our portfolios, we remain cautious with above-average levels of cash and currently prefer large-cap, high quality North American companies with strong balance sheets, reliable earnings streams, growing dividends and lower beta attributes.

Top Picks:

Alphabet (GOOGL.O) Added to position in April 2016 at ~US$705

Alphabet (formerly Google) is the world’s largest Internet company, specializing in search and advertising. GOOGL controls over 74 percent of the U.S. Internet search engine market and nearly 60 percent of global search ad revenue. Indeed, the Google brand is one of the most recognized brands in the world. YouTube volume growth, increasing mobile ad sales and further cost controls should continue to drive GOOGL’s revenue and profits as mobile search volumes rise globally. In addition, GOOGL’s new CFO has helped provide greater transparency and expense discipline in the company’s operations. The shares currently trade at a forward price-earnings multiple of 20x with an estimated long-term earnings per share (EPS) compound annual growth rate (CAGR) of over 15 percent.

Exxon Mobil (XOM.N) Last bought in May 2016 at ~US$89

Exxon Mobil is the world’s largest publicly owned integrated oil company and represents a conservative approach to participate in the stabilization and recovery of the energy markets. Exxon’s long-term commitment to cost control and a strong balance sheet should enable acquisition opportunities. The shares currently trade at a price-to-book value multiple of 2.15x, a discount to its 10-year average of about 2.8x price-to-book. Exxon Mobil shares currently pay a 3.3 percent dividend yield. Over the last 5 years, XOM has delivered an annual dividend growth rate of over 10 percent.

Metro (MRU.TO) Last bought in April 2016 at ~C$42

With annual sales of over $12 billion, Metro operates a network of over 600 food stores in Quebec and Ontario. As a traditional consumer staples stock, Metro provides investors with stable and predictable growth along with a modest but growing dividend. The shares currently trade at a forward price-earnings multiple of 17x with an expected long-term earnings per share (EPS) compound annual growth rate (CAGR) of over 10 percent. MRU shares currently pay a modest 1.3 percent dividend yield but has delivered a 16 percent dividend growth rate over the last 5 years.