Teal Linde, portfolio manager and publisher at Linde Equity Report

Focus: North American large and mid-caps
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MARKET OUTLOOK

END OF EARNINGS RECESSION A POSITIVE FOR THE MARKETS
Corporate earnings once again appear to be growing. Encouragingly, this increase in earnings has coincided with a pickup in U.S. GDP and in purchasing manager surveys, which would suggest that the quality of the earnings recovery is strong. Over the long term, earnings drive stock prices, so continued earnings growth in the coming quarters would suggest the market can continue to grind higher. Stocks, however, are not without risks. A continued rise in the value of the U.S. dollar could slow this earnings recovery and cause the markets to get jittery. In addition, investor sentiment has seen a huge boost from the election of Donald Trump as president and the Republicans taking control of both houses of the U.S. Congress. Often, the election of new presidents causes immediate positive market reaction. However, as reality sets in and investors realize that promised changes will be implemented more slowly than originally anticipated, the historical tendency is for a sell-off to occur, particularly during a new Republican president’s first year in office. We are cautiously bullish due to the earnings recovery but, at the same time, aware of the potential for the current enthusiasm over the state of U.S. politics to wane as we enter 2017.

TOP PICKS

FACEBOOK INC. (FB.O) – Last purchased on November 23, 2016 at $120.52
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. Despite the company’s enormous size, Facebook grew revenues 59 per cent year-over-year last quarter. Monthly active users grew 15 per cent to 1.7 billion — its largest leap in over three years. Facebook is expected to grow revenues and EPS by 35 per cent and 27 per cent, respectively, in 2017. Despite strong growth rates, Facebook trades at a very reasonable 23 times 2017 expected EPS.

ALPHABET INC. (GOOGL.O) – Last purchased on November 23, 2016 at $776.39
Alphabet, through its ownership of Google, is the world’s largest online advertising company. Over 90 per cent of its $85 billion in annual revenue comes from online advertising. In addition to its main “search” advertising business, Google is enjoying growth in “display” advertising, YouTube advertising, and monetization of its Android operating system primarily through Google Play. The company has over $75 billion in net cash, representing 14 per cent of its market cap. In the third quarter, revenue rose 20 per cent to $22.5 billion over the year-ago period while net earnings increased 26 per cent to $7.25 per share. Paid clicks rose 33 per cent, compared with a rise of 29 per cent in the second quarter. Alphabet is expected to grow revenues and EPS by 16 per cent and 19 per cent, respectively, in 2017 and trades at 19 times 2017 expected earnings.

FIVE BELOW (FIVE.O) – Last purchased on November 8, 2016 at $37.08
Five Below is a value-focused general merchandise retailer targeting primarily teens and pre-teens in the mid-Atlantic and mid-west regions of the U.S. The company recently opened its 500th 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. Five Below differentiates itself from the Dollar Generals, Family Dollars and Dollar Trees in the U.S. by targeting a price point of $5 and below, instead of the traditional $1 range, and focuses more on teens and pre-teens while the other dollar stores focus primarily on their parents. 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.
 

PAST PICKS: DECEMBER 14, 2015

COGNIZANT TECHNOLOGY SOLUTIONS (CTSH.O)
On September 30, the company disclosed an internal bribery probe and that its president (and former CFO since the 1998 IPO), Gordon Coburn, resigned abruptly. No explanation or appreciation for his service to the company was mentioned. Given that Mr. Coburn was responsible for reporting Cognizant’s stellar financial results for most of the last 18 years, his sudden resignation raises a red flag. Position sold.

• Then: $59.76
• Now: $57.64
• Return: -3.54%
• TR: -3.54%

ELEMENT FINANCIAL (EFN.TO)
In early October the company split into two: Element Fleet Management Corp. and ECN Capital Corp. Both stocks are trading at a discount to where they theoretically should be. Improving operating results and a much higher dividend should boost Element Fleet. The successful launch and operation of its first rail or aviation asset managed fund should boost ECN Capital.

• Then: $15.81
• Now: $11.23
• Return: -10.82%
• TR: -10.22%
• Total return including ECN Capital: -8.99% (this is included in the total return average of all three past picks).

AIR LEASE (AL.N)
Ironically, as Element felt the need to separate its leasing and managed assets business into separate companies, Air Lease is keeping their aircraft leasing and managed aircraft assets funds together under one roof. In contrast to Element, which has suffered from operational short falls, Air Lease just reported 21 per cent EPS growth last quarter and its highest-ever adjusted-pretax return on equity of 19 per cent.

• Then: $30.68
• Now: $35.87
• Return: +16.91%
• TR: +17.49%

TOTAL RETURN AVERAGE: +1.65%
 

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