Teal Linde, manager of the Linde Equity Fund
Focus: North American mid- and large-caps

MARKET OUTLOOK

Monetary stimulus has been a key factor supporting markets during most of the last decade. Every market decline has been met with more as central banks seem convinced a drop in asset prices will bring on recession. Markets have virtually always rallied when central banks purchased assets. Including dividends, the S&P has generated a 13.4 per cent annualized return over the last 10 years while the Japanese S&P/TOPIX 150 and the S&P Europe 350 delivered 9.2 per cent and 8.9 per cent respectively. Not bad when you consider annual real GDP growth never exceeded 3 per cent in the U.S., 2 per cent in Japan and 2.5 per cent in Europe since 2010. Canada generated almost identical economic growth as the U.S. but had one of the few central banks that didn’t aggressively intervene in markets and the TSX only generated a 7.2 per cent annualized return, including dividends.

It is hard to explain how truly unusual it is for the Fed to be aggressively easing monetary policy with 3.5 per cent unemployment, inflation at around its 2 per cent target and virtually all U.S. government bond yields below 2 per cent. This has never happened before. All this stimulus is beginning to create distortions, including a surge in stock price-to-earnings ratios, record high household net worth to GDP ratios, four fifths of new publicly-listed companies being unprofitable, unprecedented U.S. corporate debt and even the Bank of Japan being the largest stock holder in that country.

Inflated stock valuations speak to the need for selectivity in holdings. At the Linde Equity Fund, we continue to be focused on selecting companies whose underlying fundamentals are consistent with their stock prices. This means ensuring earnings growth is supported by strong top line growth, not just margin expansion or support from central banks.

TOP PICKS

ROYAL BANK (RY:CT)
Last purchased on Oct. 21, 2019 at $107.09.

Canadian bank stocks have suffered their slowest growth rates since 2016. Valuations are at the low end of their historical range. While the banks suffered from net interest margin contraction and rising credit loss provisions, their capital market divisions have also been weak. However, much of their capital markets segments will likely see improvement as postponed deals and transactions in 2019 carry over to 2020. As the Canadian bank with the strongest capital market division and a significant portion over their overall business in this area, and with it trading at 11.3 times 2020 expected earnings per share (EPS) of 9.24, Royal Bank is well positioned to recover in the year ahead as a result of an improvement in its large capital markets division and easing of net interest margin pressure.

ALPHABET (GOOGL:UW)
Last purchased on Oct. 25, 2019 at $1,265.33.

There are many stocks that are seeing their share prices rise without fundamental justification. At Linde Equity, we prioritize companies achieving rapid earnings growth supported by rapid revenue growth first, expanding margins second, and central bank support third. Alphabet is a great example of a company achieving strong long-term EPS growth supported by revenue growth. Despite having annual sales in excess of $100 billion, the company is still expected to grow revenues and EPS around 18 per cent in 2020. This growth rate is more than triple the growth rate of the S&P 500, yet it trades at only a 40 per cent premium to the S&P 500. Paying this premium for 200 per cent faster growth is attractive in today’s market.

FACEBOOK (FB:UW)
Last purchased on Oct. 25, 2019 at $188.51.

Facebook is also another example of a company growing more than three times faster than the S&P 500, yet trades at only a 20 per cent premium to the index. It’s the world’s leading social network company and it owns the increasingly popular Instagram. Nearly half of all Internet users are on Facebook, spending 20 to 40 minutes per day on average on the site. Facebook’s growth strategy is straight forward: Build the user base, increase engagement and then monetize. Facebook is seeking to further monetize its Instagram service by introducing Checkout, which allows users to make a purchase without leaving the app. With capex spending moderating next year, Facebook is expected to grow both revenues and EPS in excess of 20 per cent in 2020. Trading at 21 times 2020 expected EPS of $9.15, Facebook’s valuation is considered attractive for a company growing its top and bottom line over 20 per cent.

PAST PICKS: MARCH 11, 2019

LINAMAR (LNR:CT)

• Then: $50.78
• Now: $48.20
• Return: -5%
• Total return: -4%

AIR LEASE (AL:UN)

• Then: $34.79
• Now: $47.70
• Return: 37%
• Total return: 39%

TRICAN WELL SERVICES (TCW:CT)

• Then: $1.40
• Now: $1.05
• Return: -25%
• Total return: -25%

Total return average: 3%

WEBSITE: www.lindeequity.com