William Chin's Top Picks: Jan. 21, 2020

William Chin, portfolio manager at Caldwell Investment Management
Focus: Technical analysis and macro portfolio strategist

MARKET OUTLOOK

U.S. and Canadian indexes are making new highs, but there’s significant disagreement among market participants and strategists. The bears say the market is expensive, citing many well-respected metrics. One such metric is the S&P 500 market cap to U.S. GDP ratio, currently at around 150 per cent.

At the same time, the bulls are pointing to the fact that more than 40 per cent of sales for these companies are from overseas markets, so U.S. GDP doesn’t really apply. One overriding and unusual combination is the Federal Reserve cutting interest rates when major U.S. indexes are making all-time highs. The Fed’s reason to cut is to provide some insurance against trade-related uncertainties.

U.S. trade policy is rerouting the global supply chain. The Trump administration’s often hostile approach is driving money into the country, which is regarded as a safe haven. Of course, we have to see the long-term impact of these changes. For one they create uncertainty, which is bad for business decision-making such as capital spending. We have seen a shrinkage in global trade volumes, which isn’t going to be good for anybody. Stocks are benefiting for now, though, and it’s important to also note that there are still good opportunities out there.

So where are we headed? It is impossible to survey all the participants and sort out what they are doing and how they are thinking. However, we can look at the price chart, which is the summation of what everybody has done. If you want to be fancy, you can call it “behavioural finance.” That’s technical analysis. In a visual manner, you can see the result of what everyone has done. Spending a few minutes looking at the chart will give you very important information.

While we acknowledge there are soft spots in the North American and the global economy, the S&P 500 has been making new highs and that of course is proving the bears wrong so far. It is also overbought, so a correction could be due. That brings us to one very important consideration for our viewers: their investment time horizon. If you are a shorter-term investor, make sure you stay nimble because markets can change fast. If you need your money within the next two years, it is better to be extremely conservative because there is no way anyone can correctly predict within a two-year time horizon. Please consult your financial advisor on your overall risk parameters and financial planning.

TOP PICKS

CARGOJET (CJT TSX)

Cargojet has been in our Caldwell Canadian Value Momentum Fund for a few years and it continues to perform well. It’s a provider of time-sensitive overnight air cargo services to Canada, the U.S. and Europe. It could be a candidate for shorter-term investors. We last added to the position at $101.84 on Dec. 9.

TYSON FOODS (TSN NYSE)

Tyson is a global food company. Its main segments are beef, pork, chicken and prepared foods. The last one is a new line of high-margin business. It has high-quality, secured supplies and given the health concerns around pork in particular, Tyson is a good name to stick to in this industry. We initiated the position at $61.20 on Jan. 18, 2019. As the stock price rose, we have been trimming it to bring it back down to our target weight.

Tyson is one of the top performers in our “dividend growers” strategy. In this strategy, we identify companies that generate great cash flows and are also doing it at an increasing rate. Unlike other dividend strategies, we are not too concerned if that cash is being paid out as dividends: If the company can find better uses for the cash, more power to them. These “dividend growers” have proved to be very strong performers over the long run.

KEYSIGHT TECHNOLOGIES (KEYS NYSE)

Keysight is a measurement company engaged in providing electronic design and test solutions to communications and electronics industries. It is very well-managed. We initiated the position on June 30, 2017, and added to it at $80.40 on May 30, 2019. We have been trimming it to bring it back down to our target weight.