John O'Connell is chairman and CEO of Davis Rea. His focus is North American large caps.
Top Picks:
Facebook (FB.O)
Facebook is a social networking/media company that has been growing significantly through the last few years. The market is currently only beginning to appreciate the magnitude of advertising potential in Instagram as new advertising formats (e.g. video and interactive advertisements) are released. By next year, we should be seeing some form of monetization in its virtual reality division (the Oculus Rift) as well as its messaging services (Facebook Messenger and WhatsApp) as they approach the 1-billion-user mark. Facebook's core service recently hit the milestone of one billion users active in a single day, and we anticipate that their growth strategies will continue to prove fruitful as they leverage the advertising opportunity behind Instagram and increase the rate at which they monetize users.
Element Financial (EFN.TO)
Element Financial is an equipment financing business with the majority of its revenues coming from its commercial leasing business. It recently completed two acquisitions in the U.S. and is now positioned as the market leader in commercial leasing. Despite the recent growth through acquisition, the company is still firing on all cylinders and continues to grow organically through its verticals. Element is changing its business mix to increase the amount of revenue through its fleet fee businesses (these are their funds), and increase focus on durable recurring revenue through the service business. We see potential for additional acquisition targets going forward, but in the interim, there still are synergies to be realized throughout the acquired businesses, and the company recently initiated an annual dividend of $0.10/share. As the largest commercial leasing player in the U.S. and Canada, it should continue to reap the benefits of economies of scale through procurement savings, and in the short term, it should be the beneficiary of fund flows as dividend funds are now allowed to own it.
Cisco Systems (CSCO.O)
Cisco Systems is a networking and communications giant. Despite slowing growth over the last couple of years and strong currency headwinds, the company's businesses remains intact. It remains a market leader in its industry as its new management continues to transition the business. It continues to generate strong free cash flow, having a yield of 8.7 per cent, and is relatively cheap compared to its competitors. Cisco looks attractively valued at these levels, trading at 12x forward 2016 earnings while yielding 3.07 per cent. Despite headwinds relating to the business, the new CEO (Chuck Robbins) continues to execute well and we expect that we will see continued momentum going forward into a challenging business environment. It recently entered into a strategic partnership with Ericsson to bolster its offerings in networking gear and promote cross-selling opportunities, and we continue to like Cisco's focus on developing the Internet of Things.
Past Picks: January 28, 2015
McDonald's (MCD.N)
Then: $88.78 Now: $114.16 +28.59% Total return: +33.01%
Stryker (SYK.N)
Then: $92.75 Now: $96.46 +4.00% Total return: +5.15%
Cisco Systems (CSCO.O)
Then: $26.81 Now: $27.25 +1.66% Total return: +4.06%
Total Return Average: +14.07%
Market outlook:
The economy is expanding moderately in North America but is slowing as we head toward 2016. Global manufacturing and industrial production numbers are softening, resulting in weakening commodity prices and the overall supply and demand balance for commodities such as oil and copper weighing down the markets. Valuations have improved slightly as the intermediate correction we had experienced brought valuation levels down. U.S. equities have rallied despite a toughening business environment that has been exacerbated by the continued strength in the U.S. dollar and increasing labour costs .
Energy production numbers are beginning to roll over as the commodity pricing environment continues, and we are seeing the effect come through globally, as Saudi Arabia is under renewed pressure to reduce production targets. The U.S. Federal Reserve will likely raise rates in December, putting a temporary halt on the rally that we've seen in U.S. equity markets. We would preach holding a conservative stance and maintaining a cash balance to take advantage of any potential opportunities that may arise.