Teal Linde, portfolio manager and publisher at Linde Equity Report

Focus: North American large and mid-caps
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MARKET OUTLOOK
Over recent weeks investors cheered as the S&P 500 index closed at new record highs. Strong first-quarter earnings contributed to the market’s rise with 74 per cent of companies reporting beating analysts’ consensus estimates (compared to an average “beat rate” of 68 per cent over the last five years) and overall earnings per share increasing an impressive 21 per cent compared to the first quarter of last year. Markets and investors, however, may be overreacting to the good news. Last year’s first quarter was weak from an earnings perspective, particularly weighed down by poor energy and materials sector results. Accordingly, the current strong year-over-year results may not be a true reflection of the strength of the economy or corporate prospects, but rather the benefit of easy year-over-year comparisons.

From a broader perspective, markets overall have gained considerably over the last few years, but earnings have not kept pace. S&P 500 aggregate operating earnings per share over the last four quarters are still below the record high fourth-quarter operating earnings achieved in the fall of 2014. Yet while today’s earnings are only returning to 2014 levels, the S&P 500 index has climbed 21 per cent higher since then! The consequence of rising markets against flat earnings is a rising market valuation. Market gains since 2014 are attributable to multiple expansion, rather than earnings growth. Such a divergence has created a more vulnerable market.

Looking ahead, analysts are optimistically expecting earnings to continue to improve and reach record levels by year’s end. Such an outcome will help support the market and could even push it higher. However, the market does appear overdue for a pullback as no meaningful retreats have occurred this year. Therefore, while we remain long-term bullish with our individual investment holdings, the rising valuation of a market overdue for a correction warrants caution in the seasonally-weaker months ahead.

TOP PICKS

FACEBOOK (FB.O) – Last purchased on April 25, 2017 at $146.84
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 be not only your source for news and updates from friends, but also a source of entertainment. Facebook is expected to grow revenues and EPS by 39 per cent and 39 per cent, respectively, in 2017. Facebook trades at 31 times 2017 expected EPS.

CELGENE (CELG.O) – Last purchased on April 25, 2017 at $125.91
Celgene is recognized as one of the fastest-growing large-cap pharma companies. The company has achieved 19 consecutive years of record revenues. Revenues have grown at an average rate of 20 per cent per annum over the last 10 years, with 14 per cent growth being the slowest year. Celgene is a global leader in hematologic oncology (blood-born cancers) and the first pharmaceutical company to commercialize three blood cancer therapies that significantly improve the overall survivorship of patients. The company’s lead drug is Revlimid, which represents the majority of the company’s sales. The company is also moving into complementary fields of oncology and autoimmune diseases, such as treating solid tumors. Celgene is expected to grow 2017 revenues and EPS at 17 per cent and 22 per cent, respectively, and trades at 16 times 2017 expected EPS of $5.97, or a PEG ratio less than one. 

ENBRIDGE INCOME FUND HOLDINGS (ENF.TO) – Last purchased on May 23, 2017 at $33.25
Enbridge Income Fund Holdings is a holding company that owns an approximate 13 per cent economic interest in Enbridge Income Fund (the Fund), with the remainder owned by Enbridge Inc. The Fund's assets include pipelines (Canadian segment of the Mainline System, which is the largest conduit of oil into the United States) and storage assets, gas transportation assets (50 per cent of Alliance), and renewable power assets. The Fund's $30.4-billion acquisition of Enbridge's pipeline assets and remaining renewable generation assets was a transformational transaction, significantly increasing the Fund's scale, diversity and growth. ENF increased its dividend 10 per cent concurrent with the acquisition, and expects 10 per cent increases in dividend per share through 2019, supported by $9 billion of assets currently under development to be delivered through 2019. With less than one per cent of cash flow subject to market price risks including commodity, interest and foreign exchange, ENF’s 6.2 per cent dividend yield is attractive. A drop down of Spectra’s Montney-focused natural gas infrastructure (which Enbridge Inc. is acquiring as part of the Spectra transaction) could provide significant growth opportunities for the Fund beyond 2019.
 

PAST PICKS: AUGUST 15, 2016

AIR LEASE (AL.N)
After adding to the position last year, Air Lease’s stock has rallied since fall. As a result, I’ve been taking some money off the table, but still remain a shareholder. The company is also building its managed leased aircraft assets business (Blackbird joint ventures where investors put up the capital to buy planes, and Air Leases manages the leasing and collects a management fee), similar to a business model pursued by ECN Capital (Element Financial).

• Then: $27.80
• Now: $37.51
• Return: 34.92%
• TR: 35.68%

LINAMAR (LNR.TO)
Latest results were strong. Announced their twenty-third consecutive quartet of double-digit operating earnings growth. Management expects double-digit revenue and EPS growth in 2018 due to large amount of business being launched at their plants around the world. CEO Linda Hasenfratz was prescient with her $2.4-million insider purchase at $48 one week after the U.S. election. At the company’s AGM, Hasenfratz predicted that battery electric propulsion systems, hybrid engines and fuel-cell powered engines would be in 60 per cent of new cars by 2030, providing large new opportunities for parts suppliers.

• Then: $56.11
• Now: $61.92
• Return: 10.35%
• TR: 11.20%

CVS HEALTH (CVS.N)
This was supposed to be my defensive pick of the three.

• Then: $97.58
• Now: $76.64
• Return: -21.45%
• TR: -20.08%

TOTAL RETURN AVERAGE: +8.93%