Stan Wong's Top Picks
Stan Wong, director and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs
After a six-month winning streak, the S&P 500 Index turned sharply lower in October, losing nearly 10 per cent from its September peak and closing 6.9 per cent lower . This was the worst performing month since September 2011. The October price action was even worse for the tech-heavy NASDAQ (down 9.2 per cent) and small-cap Russell 2000 (down 10.9 per cent) indexes. The broader MSCI World Index dropped 7.4 per cent, while here at home the TSX fell 6.5 per cent. The heightened turbulence in equity markets seemed to be caused by a number of simmering anxieties: Fed policy and rising interest rates, U.S.-China trade tensions and the chance of a future slowdown in corporate earnings growth.
In the past week global equity markets have staged an impressive rebound, with investors looking to take advantage of a selloff that may have been overdone. Indeed, we see several data points to be constructive about equities moving forward:
- Earnings: With most of the S&P 500 Index companies already reported for this third quarter, over 82 per cent of these companies have reported positive earnings surprises
- Valuations: With the recent selloff combined with stronger earnings, the S&P 500 currently trades at a 16 times forward price-to-earnings (P/E) multiple. This is an attractive discount from a valuation high of 18 times forward P/E earlier this year.
- Economic data: U.S. economic data largely remains healthy. The Conference Board’s Leading Economic Index (LEI) is still trending higher, with last month reported as the twelfth straight month of gains.
- Midterm elections: Since 1946, the S&P 500 has always been higher 12 months following a midterm election.
- U.S. presidential cycle: The third year of the U.S. presidential cycle has been historically the strongest for stocks since 1928, averaging nearly a 14 per cent return. The second-strongest is the fourth year, with an average return of just above 6 per cent.
- Market pessimism: The CNN Fear & Greed Index is currently indicating a prevailing investor sentiment of “extreme fear” in the market. The index often provides a contrarian signal for buy/sell decisions. We last saw these levels of extreme fear during the February and March lows earlier this year.
In Stan Wong Managed Portfolios, we continue to be positioned with a relatively high weighting in U.S. equities (and the U.S. dollar) compared to Canadian equities. We have no exposure to European stocks and limited holdings in the Asia-Pacific and emerging market areas. Financials, consumer discretionary, communication services and technology are our largest sector weightings, but we anticipate a measured shift to more defensive sectors (consumer staples, health care and utilities) as the economic and market cycle matures. We expect high quality attributes (high return on equity, low financial leverage, stable earnings growth) to become more influential as the macroeconomic and earnings outlooks become more uncertain. As the current equity bull market matures, we foresee volatility levels ahead to remain uneven and elevated at times. Investor sentiment will continue to ebb and flow, with equities muddling higher. As always, we will emphasize active stock selectivity and the use of stop-loss and other risk management strategies.
Last bought in October 2018 at about US$1,725.
Amazon is one of the world’s highest-grossing online retailers, with nearly US$233 billion in estimated revenues for 2018. It’s arguably one of the most disruptive and innovative forces to emerge not only in the retail industry, but in the broader market as a whole. Amazon’s operational efficiencies, unparalleled logistic capabilities and formidable global branding provide the company with a distinct competitive advantage that very few traditional retailers are able to match. Despite traditional retailers looking to expand online, it’s likely that Amazon will maintain its considerable lead through the convenience of its Prime offering (with over 100 million users worldwide currently), expedited shipping and expanding digital content library. The company’s growing cloud segment (Amazon Web Services) is also expected to generate over US$25 billion in 2018. Longer term with more than half of the world’s Internet users coming from developing markets, Amazon’s international growth opportunities look massive. Amazon shares currently trade at a forward price-to-earnings multiple of 71 times, with a forecasted long-term earnings per share growth rate of over 50 per cent. The company reports its next quarterly results on Jan. 31.
Last bought this month at around US$199.
Mastercard is poised to benefit from powerful global secular trends over the next decade as international economies grow and the use of digital currency and electronic payments expands. Today, the company boasts over 800 million Mastercard-branded credit and other payment cards in more than 200 countries.
Last December, the company authorized a US$4 billion share buyback program, reflective of management’s commitment to enhancing shareholder value. Mastercard has reported thirteen consecutive quarterly positive earnings surprises. The shares currently trade at a forward price-to-earnings multiple of 27 times, with a forecasted long-term earnings per share growth rate of over 20 per cent. With the recent pullback in its share price, Mastercard shares provide a buying opportunity in a high-quality asset with reliable earnings growth. The company reports its next quarterly results on Jan. 31.
Last bought in September 2018 at around US$88.
With over US$5.8 billion in revenues, Zoetis is the world’s largest producer of medicine and vaccinations for companion and livestock animals. Zoetis was spun-off from Pfizer’s animal health division in 2013. The company earns more than 55 per cent of its total revenues from livestock/production animals and the remainder from companion animals. The animal health industry features several attractive characteristics, including low generic competition and a fragmented customer base that allows for significant pricing power on the companion animal side. On the livestock/production animal side, improving standards of living in developing countries will lead to a wider adoption of protein-heavy diets, driving greater demand for livestock products. Zoetis currently trades at a forward price-to-earnings multiple of 28 times, with a forecasted long-term earnings per share growth rate of about 16 to 17 per cent. It has reported seventeen consecutive quarters of positive earnings surprises. The company reports its next quarterly results on Feb. 14.
PAST PICKS: OCT. 12, 2017
- Then: $180.53
- Now: $152.50
- Return: -16%
- Total return: -16%
- Then: $72.37
- Now: $68.26
- Return: -6%
- Total return: -3%
NORWEGIAN CRUISE LINE (NCLH.O)
Sold in June 2018 at around US$49.
- Then: $58.86
- Now: $48.00
- Return: -18%
- Total return: -18%
Total return average: -12%