John Kim, portfolio manager at Aventine Asset Management

Focus: North American equities

MARKET OUTLOOK

There are many signs the U.S. and global economy is slowing down with the possibility of a recession growing.  This could be due to many factors such as tariffs, trade wars and it has now led both the European Central Bank and U.S. Federal Reserve to become dovish.

I believe we are in the late-stages of this bull market.  Valuations are at the high-end of historic ranges and if you look at the U.S. stock market in aggregate vs. U.S. GDP (a valuation metric that Warren Buffet likes to use), we are near the historic highs set during the dot-com bubble.

Growth has also outperformed value for a decade now and the relative outperformance is also near a record, again set during the dot-com bubble.

TOP PICKS

AT&T (T.N)

Most recent purchase was on May 8, 2019 at $30.35.

• Made a transformative acquisition of Time Warner to vertically integrate with both content and broadband distribution.
• Using their free-cash flow to pay down the debt taken on with Time Warner.  This means that debt-value transfers to equity holders.
• If T-Mobile and Sprint merger actually gets approved, AT&T will be one of three national wireless carriers (similar to Canada).  Pricing pressures may alleviate somewhat.
• Extremely low valuation of less than nine times 2020 earnings estimates.
• Great dividend yield of 6.3 per cent.

CVS HEALTH (CVS NYSE)

Most recent purchase was on May 16, 2019 at $52.49.

• Made transformative acquisition buying Aetna to vertically integrate retail pharmacy and pharmacy benefits management with a healthcare insurer.
• Similar to AT&T, using free-cash flow to pay down debt.
• Extremely low valuation at less than eight times 2020 earnings estimates.
• Nice dividend yield of 3.6 per cent.

NORTHLAND POWER (NPI.TO)

Most recent purchase was on March 20, 2019 at $23.35.

• Significant cash flow and free-cash flow growth in 2020 as Deutsche Bucht comes online at the end of 2019.
• Reasonable valuation with 2020 price-to-earnings ratio of under 13 times.
• Good dividend yield of 4.7 per cent and payout ratio dropping in 2020 to under 60 per cent.

TWITTER:  @Aventine_mgmt

WEBSITE:  www.aventine.ca