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

MARKET OUTLOOK

A Market of Contradictions

Evaluating future market direction is never an easy task, but in recent months it has become increasingly difficult due to the stunning number of contradictions we are seeing in economic conditions and data. Here are some examples:

According to the JP Morgan Global Manufacturing PMI, the global manufacturing sector contracted for the sixth consecutive month in October. Manufacturing weakness is generally associated with recessions, as manufacturing historically has led the overall economy. On the other hand, the NAHB Housing Market Index, which reflects U.S. homebuilder confidence, hit a 20-month high in October and is well into expansion territory. Generally, homebuilder confidence drops towards contraction territory prior to a recession, suggesting one is not around the corner.

U.S. consumer spending is poised to grow in 2019 at its lowest year-over-year level in six years, while U.S. consumer optimism as measured by the Conference Board’s Present Situation Index hit its highest level since November 2000 in August.

Central banks are cutting rates and reintroducing quantitative easing as if an economic recession has already begun. All of this is taking place while unemployment rates are essentially at 50-year lows in the U.S. and Canada.

While plummeting bond yields traditionally suggest that the bond market fears a recession, record highs for major North American stock markets suggest that not only one is likely nowhere in sight, but that economic growth should accelerate in the coming quarters.

These economic cross-currents represent a potential fork in the road for markets and it is difficult to know which direction they will ultimately choose to go. As a result equity investors should proceed with some caution.

TOP PICKS

AIR LEASE (AL:UN)
Last purchased on Oct. 25, 2019 at $44.45.

Air Lease engages in the purchasing of commercial aircraft for lease to global airline customers. As one of the largest buyers of planes from Boeing and Airbus, it enjoys front-of-line and volume discount purchases, making it cheaper for most airlines to lease new aircraft than to buy direct. Portfolio expansion on aircraft deliveries are expected to support continued strong revenue expansion and robust 20 per cent revenue and earnings per share (EPS) growth in 2020 and 2021. The company has experienced high-teens return on equity, above peers, while leverage of about 2.5 times debt-to-equity, is below. Air Lease trades at 7.2 times 2020 expected EPS of $6.36.

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

Facebook is the world’s leading social network company. It also owns the increasingly popular Instagram. With 2.4 billion users, 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. In an effort to start monetizing WhatsApp, Facebook has recently introduced a feature called Catalog, which allows businesses to send multiple photos of products to customers at once instead of one photo at a time. 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 $9.18, Facebook’s valuation is considered attractive for a company growing its top and bottom line over 20 per cent.

ROGERS COMMUNICATIONS (RCI/B:CT)

Rogers is the largest provider of wireless and cable services in Canada, with approximately 11 million wireless subscribers throughout Canada and 5 million fixed wireline subscribers in Ontario and Eastern Canada. Rogers also has extensive media assets, including the Toronto Blue Jays. Rogers’ stock has been hit hard as a result of the introduction of its wireless unlimited data plans, which accelerated the contraction in overage revenues as adoption of the unlimited plans was much higher than expected. However, in the midst of the market’s preoccupation on the wireless side of the business, a more positive outlook is emerging for the company’s cable business that seems to be relatively overlooked. The two U.S. cable industry bellwethers, Comcast and Charter, have indicated lower capex spending this year and next. Rogers is likely to follow suit which will provide a source of free cash flow growth in 2020. Rogers’ recent share price drop has also been met with analyst upgrades, resulting in the most “buy” and strong recommendations for its stock in two years.

PAST PICKS: DEC. 10, 2018

AIR LEASE (AL:UN)

• Then: $36.32
• Now: $45.59
• Return: 20%
• Total return: 27%

INTER PIPELINE (IPL:CT)

• Then: $20.92
• Now: $21.46
• Return: 3%
• Total return: 10%

TD BANK (TD:CT)

• Then: $69.83
• Now: $76.46
• Return: 9%
• Total return: 14%

Total return average: 17%