Teal Linde, portfolio manager and publisher of Linde Equity Report

Focus: North American large and mid-caps
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MARKET OUTLOOK
2017 began on a positive note with both the U.S. and Canadian markets rising in both January and February. Since 1951, when U.S. markets rose in both of the year’s opening two months, the remainder of the year was up 23 of 25 times, with an average gain of +11.76 per cent. However, recent market gains (the Dow recently advanced in 12 consecutive sessions for the first time since January 1987) have caused bullish sentiment to rise to levels often seen near market tops (Investors Intelligence’s bullish advisor sentiment is at levels last seen 30 years ago, also in January 1987). Much of this sentiment increase is associated with Donald Trump’s election and the perception that the economy, and hence corporate earnings, will improve due to his three-pronged strategy of infrastructure building, tax reduction and regulatory reform. While regulatory changes are being implemented rapidly, tax reduction and infrastructure building may be less dramatic and more slowly adopted than what markets currently anticipate. Comparisons to 1987 (Reagan’s U.S. tax reforms were signed into law in October 1986) are sobering as in that year, markets had a very good first half, only to give back virtually all gains by year’s end (it was one of the two years in which a positive January and February was followed by market losses). In a market where historically-reliable indicators are pointing to very different potential outcomes, a barbell approach to investing continues to make sense. On one side, investors should concentrate on stocks that will provide strong, secure dividends (with an emphasis on safety). On the other side, investors can choose select growth stocks with superior business models that enable the companies to continue to grow earnings regardless of economic or market conditions.

TOP PICKS

PAINTED PONY PETROLEUM (PPY.TO) – Last bought on January 25, 2017 at $8.36  
Painted Pony is as an industry leader in the low-cost, full-cycle Montney development. The company increased fourth quarter 2016 average daily production volumes by 144 per cent to 36,695 boe/d over the year before. It expects 2017 annual average daily production to increase 85 per cent on a per share basis to 43,000 boe/d, up from 23,204 in 2016. For 2018, average daily production is expected to grow 40 per cent to 60,000 boe/d. Management recently reduced its capital budget in light of recently weaker natural gas prices to help retain financial flexibility for the corporation. Yet despite the capital reduction, Painted Pony is expected to still deliver the fastest production growth rates from 2016 to 2018 among its peers. The company has also financially hedged approximately 75 per cent of 2017 natural gas production volumes. Based in the NE British Columbia Montney region, Painted Pony enjoys a reduced royalty rate of three per cent, and sells 70 per cent of its production directly to customers in British Columbia and upper North West United States.

FACEBOOK (FB.O) – Last purchased on February 15, 2017 at $133.43
Facebook is the world’s leading social network company. It also 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. The company is increasingly creating a “walled garden” or “closed city” by offering additional services and conveniences that give people less and less reason to ever leave their Facebook world. More recently, the company is investing heavily in video with its “video-first” strategy. Founder Mark Zuckerberg has directed the company to weave video across all of its products. “I see video as a mega trend on the same order as mobile,” said Zuckerberg. He wants Facebook to not only be your source for news and updates from friends, but also a source of entertainment. Facebook is expected to grow revenues and EPS by 37 per cent and 28 per cent, respectively, in 2017. Despite strong growth rates, Facebook trades at a reasonable 25.5 times 2017 expected EPS.

FIVE BELOW (FIVE.O) – Last purchased on February 15, 2017 at $39.57
Five Below is a value-focused, general-merchandise retailer targeting primarily teens and pre-teens in 31 states across the mid-Atlantic and mid-west regions of the U.S. The company recently opened its 531st store, is growing its top line and bottom line at 20 per cent+, and plans to expand to over 2,000 stores across the U.S. Its first store in California will open this spring. Five Below differentiates itself from the Dollar Generals, Family Dollars, Dollar Trees in the U.S. by targeting a price point of $5 and below and focuses more on teens and pre-teens, while the other dollar stores focus primarily on their parents. Examples of items that can be purchased for $5 include Bluetooth speakers/headphones, remote control cars, and HDMI cables. As a result, Five Below has no direct competitors. With a business model that enables the company to earn a one-year cash payback on new stores, the company expects to maintain 20 per cent sales growth and 20 per cent+ net income growth through 2020.
 

LINAMAR (LNR.TO)

• Then: $63.02
• Now: $59.85
• Return: -5.09%
• TR: -4.39%

BOFI (BANK OF INTERNET) HOLDINGS (BOFI.O)
After originally buying this stock for clients in January 2013 at $7.50, I sold BofI last year because there was too much smoke starting to come from the company. The tipping point occurred when a pension plan in Houston updated their court documents in a lawsuit against BofI for losses suffered on their investment in its stock. The updated filings revealed nearly a dozen former employees from BofI’s single office in San Diego providing testimony against the company. This development appeared more serious and credible than the short attack articles published on Seeking Alpha that were discrediting management and the company. Just over five weeks ago, a Bloomberg article cited Bank of Internet as the #1 most shorted bank stock in the U.S., and the fifth most shorted financial stock. The smoke continues to plume. Better to invest elsewhere.

• Then: $20.11
• Now: $29.99
• Return: +49.18%
• TR: +49.18%

PAINTED PONY PETROLEUM (PPY.TO)

• Then: $4.62
• Now: $5.86
• Return: +26.62%
• TR: +26.62%

TOTAL RETURN AVERAGE: +23.80%