Zachary Curry is COO and Portfolio Manager, Davis Rea. His focus is North American large caps.
Spartan Energy (SPE TSX)
Recent acquisition of assets from LightStream and financing position the company well for future growth – with one of the strongest growth profiles in the intermediate space. Spartan also just announced a small purchase of an additional 20 sections of land in SE Saskatchewan. Notwithstanding this, 2015 forecast debt-to-cash-flow is 0.1x (versus 1.5x for comparable companies). All of expected capital spending for 2014 and 2015 will be funded from cash flow from operations. Strong management team has experience in building and growing intermediate energy companies.
Apple (AAPL NASDAQ)
iPhone 6 introduction should be positive given the refresh cycle, as well as potentially having 2 different screen sizes. AAPL’s higher-end products have traditionally performed well. An iPad refresh could also benefit, given the rise in use of tablets. The unknown remains all-new product introductions which could further benefit the company – through both hardware and software. The dividend yield of 2% is a benefit.
Element Financial (EFN TSX)
Strong organic growth combined with incremental M&A opportunities could provide strong upside. Recent acquisition of PHH should allow for greater growth opportunities in the fleet business. Strong balance sheet should allow for a potential investment grade credit rating at some point. There is also the potential to initiate a dividend at some point in the future.
Past Picks: August 21, 2013
Tourmaline Oil Corp. (TOU TSX)
Then: $40.71; Now: $54.76; Total return: +34.51%
Google Inc. (GOOGL NASDAQ) * SPLIT* INTO GOOG AND GOOGL
Then: $869.33; Now: $580.04; Total return: +33.32%
Cisco Systems (CSCO NASDAQ)
Then: $24.07; Now: $25.44; Total return: +8.99%
Total return average: +25.61%
The global equity market looks fairly valued. However, North American markets are overvalued, a sign that they are priced for perfection. The greatest degree of overvaluation is evident in small and mid-cap indexes, which look positively bubbly. The large cap S&P500 is overvalued by about 20% (frothy), similar to the TSX. The megacap S&P100 is about 12% overvalued. U.K. and Eurozone equity markets look fairly valued, or only slightly overvalued, while emerging markets (notably China) and Japan look cheap. Where North American markets appear to be priced for perfection, Chinese and Japanese markets appear to be priced for major problems ahead. Favoured sectors include information technology and health care (notably equipment and services) in the U.S. and energy in Canada.
Persisting low inflation implies that central banks will be in no hurry to increase their policy interest rates, implying negligible returns from holding cash for another year or longer. This will keep the pressure on investors to reach for better returns in bonds and equities. The improving global and U.S. growth picture suggests that bond yields will drift somewhat higher over the remainder of this year, though 10-year government bond yields in Canada and the U.S. will likely have trouble rising above 3%. This argues for a below benchmark duration on fixed income portfolios. Economic growth suggests that corporate earnings will continue to increase, to the benefit of corporate securities. Corporate bonds should benefit from this as well as their higher yields, and we favour an overweight position in corporates.