Sep 27, 2018

Veronika Hirsch's Top Picks: Sep. 27, 2018

BNN Bloomberg

Veronika Hirsch , BNN Bloomberg

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

MARKET OUTLOOK

While waiting for the conclusion of NAFTA negotiations between Canada and the U.S., I have been focused mostly on the U.S. market fundamentals. The resiliency of the U.S. market has been noteworthy especially in the face of mounting risks, such as the escalating tariff and trade wars and the rapidly approaching congressional mid-term elections. Historically, the election outcome uncertainty has led to market weakness in the weeks preceding the elections. Not only have we avoided meaningful volatility so far this summer, but most market indexes have recently registered new all-time closing highs.

The most likely reason for the unseasonal market strength is the diverging relative economic backdrop. U.S. economic vigor has been attracting investment capital not only from the rest of the developed economies, which have cooled substantially from last year’s healthy pace, but most notably from the emerging markets, several of which have deteriorated into crises. What should investors expect for the balance of the year? If we were to rely on history, stocks should be strong coming out of the elections and keep rising well into next year. The only caveat would be a Democratic sweep, which would be viewed with alarm by investors who've become addicted to the pro-growth Republican policies.

Despite very robust U.S. economic and corporate momentum, investors have begun to worry about the extended length of the current cycle. The fear is that the Fed tightening policy will not be tempered in time and will eventually result in the inevitable downturn. However, that worry can be deferred until next year.

TOP PICKS

MASTERCARD (MA.N)

Mastercard has perhaps several decades of growth ahead of it, as credit card penetration around the world catches up to North American levels. Perhaps even more interesting is the growth and profitability the company can gain from enhancing the range of payment-related products and services it can offer to both its consumers and merchants. I would expect Mastercard to continue growing its revenues and EBITDA even through a recession. The principal risk to investors is the high stock valuation, which would suffer in a market downturn.

ALIMENTATION COUCHE-TARD (ATDb.TO)

Couche-Tard reported very impressive merchandise same store sales for all three geographic regions in the latest quarter. After several years of mixed results and range-bound stock price, it might be time to revisit this superbly managed company.

Despite decades of well timed and well executed acquisitions, Couche-Tard has lots of room to grow its market share in the U.S. and Europe. Valuation has come back to earth after recent execution missteps and exaggerated fears of E-car penetration. I have taken an initial position and will watch next reporting season with keen interest.

METRO (MRU.TO)

Metro is the best managed food retailer in Canada and should be able to enhance its operations and gain meaningful synergies from its recent acquisition of the Jean Coutu drugstore chain. I have picked the company for its ability to ride out both a difficult economy and a difficult market environment, just in case the global economy slows down next year. The valuation is reasonable and the stock might get a lift in a difficult environment, as investors seek its defensive characteristics.