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

MARKET OUTLOOK

From a corporate earnings perspective, the third-quarter earnings season has been better than expected, with nearly 79 per cent of S&P 500 companies reporting positive earnings surprises. The U.S. economic expansion now stands at 125 months, the longest expansion in history. With fiscal and monetary policy remaining accommodative, we could it extend further yet in a slow-burning, low growth pace.

However, the global macroeconomic and equity market landscape includes a number of potential downside risks. Rising trade protectionism around the world, weakening manufacturing data, slowing earnings growth and geopolitical unrest are some of the main concerns. From a fundamental perspective, the S&P is trading near a 10-year valuation high with a forward P/E today of almost 19 times. From a technical perspective, the index is in overbought territory and vulnerable to a near-term pause or consolidation. While equities could grind higher, the path would likely be punctuated with periods of elevated volatility. Against this backdrop, we recommend investors to approach equity markets with caution as sector and security selection becomes increasingly crucial.

TOP PICKS

AMERICAN TOWER (AMT:UN)
Last bought this month at $205.

American Tower Corporation is a real estate investment trust that owns, operates, and develops wireless communications and broadcast towers globally. It owns and leases roughly 170,000 cell towers throughout the U.S., Asia, Latin America, Europe, and the Middle East. U.S. data consumption has been growing about 40 per cent yearly, doubling about every two years. This pace is expected to continue due to rising video content and the looming upgrade to 5G networks. Increased usage of cloud services, social media and gaming has also placed greater demands for further network capacity. In international markets, wireless networks are a decade behind the U.S. and will require massive investment as it transitions from 3G to 4G and then to 5G. Telecom carriers will need to continue investing in their networks, providing American Tower with a highly visible and stable revenue stream. Over the past five years, the company has grown its funds from operations (FFO) by nearly 15 per cent yearly. Shares currently trade at 22 times enterprise value to EBITDA, a valuation near its 10-year historical mean. The company pays a 1.7 per cent distribution yield and reports its next quarterly results on Feb. 27.    

CVS HEALTH (CVS:UN)
Last bought this month at $72.

With an estimated revenue of over US$250 billion in 2019, CVS Health is one of the largest health care services companies in the U.S. It operates through three main segments: pharmacy services, retail/long-term care, and healthcare benefits. The company is a leading pharmacy benefits manager with nearly 92 million plan members and the nation's largest drugstore chain. It runs nearly 10,000 retail and specialty drugstores. In addition to its standalone pharmacy operations, the company operates CVS locations inside Target stores and runs a prescription management company, Caremark Pharmacy Services. The company also offers walk-in health services through its retail network of clinics that are located in about 1,100 CVS stores. In 2018, CVS acquired health insurer Aetna, adding traditional health insurance plans serving more than 38 million people to its operations. The shares offer investors a defensive name with an attractive valuation. CVS trades at 11 times forecast earnings with a long-term estimated earnings growth rate of 6 to 7 per cent. The company pays a 2.7 per cent dividend yield and reports its next quarterly results on Feb. 12.    

FACEBOOK (FB:UW)
Last bought in October 2019 at $176.

Facebook is the world’s largest online social network, with more than 2.45 billion monthly active users. Advertising represents more than 90 per cent of an estimated US$70.5 billion in 2019 revenues. In 2020, Facebook’s revenue is expected to climb to nearly US$86 billion. The Facebook app along with 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 and unique 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. It’s an unquestionable secular growth story, reporting 20 consecutive quarters of positive earnings surprises. The shares are attractively valued, trading at 22 times forecast earnings with a long-term estimated earnings growth rate of about 20 per cent, thus giving the shares an estimated price/earnings to growth ratio of 1.1 times. Facebook reports its next quarterly results on Jan. 29.

PAST PICKS: DEC. 6, 2018

MASTERCARD (MA:UN)

• Then: $202.99
• Now: $284.45
• Return: 40%
• Total return: 41%

PFIZER (PFE:UN)

• Then: $44.98
• Now: $37.74
• Return: -16%
• Total return: -13%

CONSUMER STAPLES SELECT SPDR ETF (XLP:UW)

• Then: $55.42
• Now: $61.40
• Return: 11%
• Total return: 14%

Total return average: 14%