Feb 28, 2018

Veronika Hirsch's Top Picks: Feb. 28, 2018

BNN Bloomberg

Veronika Hirsch , BNN

Veronika Hirsch, portfolio manager at Arrow Capital
Focus: Canadian equities and alternative investment

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MARKET OUTLOOK

Now that inflation and interest rates have bottomed, volatility has returned to the equity markets. Currently, there aren't many predictions for runaway inflation or excessive interest rate hikes. Nonetheless, we face the possibility untested Fed Chair Jerome Powell will mismanage the monetary policy at this difficult stage of the economic cycle, thus causing a serious market upheaval. Worse yet: we can now imagine a set of circumstances which could eventually lead us into a recession. Stock picking has then become tricky.

On the positive side, U.S. tax reform will ensure robust earnings growth for American corporations and should lead to much higher level of capital spending, giving the economy a solid boost. On the negative side, inflation could exceed expectations if current fiscal stimulus causes the already healthy economy to overheat.

The U.S. remains one of the most attractive markets for global investors despite the uncertainty. Canadian equities will surely remain a poor alternative until current trade issues are resolved. Even then, the country’s economy lacks a growth catalyst capable of offsetting the drag rising interest rates will exert on heavily indebted Canadian consumers.

TOP PICKS

CISCO SYSTEMS (CSCO.O)

Cisco remains an inexpensive technology stock, as the company has meaningfully lagged its industry growth rates. Newly introduced family of switches designed for improved security and programmability should enhance growth and margins. The company’s acquisition strategy will also act to supplement its growth prospects.

The main reason to like the stock, however, is for the deployment of the repatriated cash hoard. Nearly $70 billion will allow the company to buy back a lot of stock, raise the dividend several times, and make many acquisitions even if the U.S. economy falls into a recession. In other words, I like Cisco for its defensive qualities, as a recession would barely dim its prospects.

CONSTELLATION BRANDS (STZ.N)

Constellation Brands has a very attractive portfolio of alcoholic beverage brands with several pending product introductions, which could help the company grow well above its recent guidance. It also made a bold entry into the legal cannabis market with its recent investment stake in Canopy Growth. Constellation plans to spend $10 million developing unique cannabis-based beverages, giving its first-mover advantage in this nascent market. Clearly it’s too early to speculate on the prospects of this type of product, but the initiative might bear meaningful fruit several years in the future. Not to harp on the same theme again, but Constellation’s business would be reasonably recession resistant.

CCL INDUSTRIES (CCLb.TO)

CCL Industries has been my pick many times in the past for a variety of reasons. It has an enviable track record of finding acquisitions which fit well into its product portfolio. Management has done an excellent job integrating the new businesses without too many glitches.

The numerous acquisitions have allowed CCL to grow into a truly global company with minimal exposure to the Canadian economy, which I currently find appealing. Even though CCL has several cyclical businesses, it’s well-diversified across geographies and clients. Management has recently expressed willingness to wait until next recession to make its next major strategic acquisition, but smaller, less expensive tuck-ins are being actively pursued.