Teal Linde, Portfolio Manager and Publisher, Linde Equity Report

FOCUS: North American Equities

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MARKET OUTLOOK:

On July 11, the S&P 500 hit a new all-time high closing high after having not made one for over a year. Historically this augers well for returns over the next year as it reflects a revitalization of investor risk appetite. The decline in earnings, which has been prevalent in 2015 and the first half of 2016, also appears to be ending and the second half of 2016 should see positive year-over-year comparisons which is whipping up investor enthusiasm. Market valuations are currently very high on a historical basis (due to the run up in stock prices while earnings were deteriorating over the last year and half) and this bodes poorly for long-term stock returns.  However in the near-term, an expensive market can become even more expensive (as during the tech bubble) and with central banks (through quantitative easing) and companies (though buybacks) reducing the supply of securities on the market while demand remains robust, equities have a good chance of grinding higher for the next twelve months.

Top Picks:

Air Lease (AL.N), Last bought on July 19, 2016 at $29.10

Air Lease was founded in 2010 by Steve Hazy, who previously built the world’s largest aircraft leasing company. As one of the largest buyers of planes from Boeing and Airbus, Air Lease enjoys front of the line privileges, volume purchase discounts, launch price discounts, and investment grade borrowing rates. It then offers its planes to smaller airlines around the world who, if they wanted to buy a plane from Boeing or Airbus, would have to wait further back in line, pay full fare, and incur higher borrowing costs. It’s cheaper for these airlines, mostly based in the emerging markets, to lease their planes from Air Lease than to buy direct.  Last quarter, revenues grew 22 per cent and EPS grew 20 per cent. Air Lease is expected to grow revenue and EPS at 16 per cent and 21 per cent, respectively, in 2016. Despite rapid growth rates, Air Lease trades at a forward P/E of 9.5, or a PEG ratio of 0.45.

Linamar (LNR.TO), Last bought on July 28, 2016 at $51.99

Linamar is Canada’s 2nd largest auto parts company, employing 19,500 people across 48 manufacturing facilities worldwide. The family controlled company continues to benefit from outsourcing of automobile component design, manufacturing and assembly by auto companies around the world. Revenues increased 24 per cent in 2015 outpacing global auto production growth of 2 per cent. Record revenues were achieved for the 5th consecutive year. For the recently announced Q2 2016, revenues increased 21 per cent year over year, while EPS jumped 30.6 per cent over last year. Content per vehicle growth achieved in every market. Linamar is currently launching 169 programs representing $3.9 billion of sales (at peak). This is expected to add incremental sales of $500 to $600 million in 2016, providing an extra 10 per cent boost to 2016 revenue growth. With revenue and EPS expected to grow 19 per cent and 15 per cent, respectively, in 2016, Linamar currently trades at an attractive 7.2 times forward earnings.

CVS Health (CVS.N), Last bought on July 28, 2016 at $93.43

CVS operates America’s 2nd largest drug store chain with nearly 8000 CVS Pharmacy and Longs Drugs locations. The company also operates one of America’s largest pharmacy benefits management companies, Caremark. CVS possesses a number of attractive attributes for investors. First, management has described a 'Silver Tsunami' where 10,000 people are turning 65 every day over the next decade. People over 65 consume far more prescription drugs than those younger. Approximately 30 million Americans will be gaining access to healthcare through the Affordable Care Act. Specialty drug spending is expected to grow at a 15 per cent annual rate over the next few years. CVS has an industry leading share in the specialty business.  With an economically resilient business and favourable growth demographics, CVS is a high quality blue chip growth stock positioned to deliver attractive long term returns.

Past Picks:  June 15, 2015

Baidu (BIDU.O)

• Then: $205.73
• Now: $174.39
• Return: -15.24%
• TR: -15.24%

DAVIDsTEA (DTEA.O)

• Then: $27.25
• Now: $13.89
• Return: -49.03%
• TR: -49.03%

Air Lease (AL.N)

• Then: $35.96
• Now: $27.99
• Return: -22.16%
• TR: -21.69%

Total Return Average: -28.65%

Twitter: @The_Linde_Group

Website: the-linde-group.com