Hap Sneddon is portfolio manager, technical analyst and founder, CastleMoore Inc. His focus is technical analysis and macro portfolio strategy.
Top Picks:
Aecon Group (ARE.TO)
The company recently announced the sale of its stake in Quito Airport in Ecuador well above the consensus price. The proceeds will be used to strengthen its balance sheet paying down some convertible debt. The sale clears the way for Aecon to focus on its core construction business and its growing order backlog. Fundamentally, the infrastructure space is in a secular bull market. Technically the stock offers excellent risk to reward with breakdown levels near at hand and an upside target just north of $20.00.
Utilities Select Sector SPDR ETF (XLU)
Utilities offer very good risk to reward at current levels after being pounded since spiking into January. Earnings revisions have bottomed and are headed back up. We are close to entering the period of string seasonality in mid-July, but based on price action seasonality can translate forward or ahead – in this case it appears the opportunity is occurring before mid-July. Strong pricing power, high cost to entry and forward thinking (alternative energy future) make utilities a long term investment though the sector can get pushed around at times by investor focus on interest rates.
JPMorgan Chase & Co. (JPM.N)
JPMorgan recently broke out of an almost year-long congestion area in the mid 60s. Intermediate term targets for this best-of-breed in the high $80s will be more likely met if the move higher in bond yields continues. Q1/15 earnings were strong, passing most expectations, and the high water mark for litigation appears to be in. An investor could also substitute JPM with an broad based financial ETF is they would like to assume less stock-specific risk.
Past Picks: July 15, 2014
Fortis (FTS.TO) (The stock was sold completely recently in two tranches)
Then: $32.76; Now: $35.82; +9.34%; Total Return: +13.37%
iShares S&P/TSX Global Gold Index ETF (XGD.TO)
Then: $12.08; Now: $9.86; -18.38%; Total Return: -18.11%
Utilities Select Sector SPDR Fund (XLU)
Then: $42.69; Now: $42.58; -0.26%; Total Return: +3.20%
Total Return Average: -0.51%
Market outlook:
There is a push-pull going on in the markets that may not appear to make sense. On one hand the consensus is that rates will rise in any of the next Federal Open Market Committee (FOMC) meetings. Raising rates is most often done to combat inflation from increasing corporate growth prospects, higher wages and accelerating housing.
With soft Q1 GDP data and modest Q2 data, a strengthening U.S. dollar (multinationals), and weak top-line earnings and bottom line hanging around from latent benefits of QE, the raising of rates is more about "normalization" of rates, wherever that level is, than it is about containing runaway growth. Central banks in fact would love a little escape velocity; they'd worry about re-entry later.
While net beneficiaries of rising interest rates, such as industrials, financials, and technology securities appear to be set up for some type of march higher with rates short term, investments in defensive or interest-rate sensitive securities, such as utilities, telecoms and infrastructure provide a good risk to reward overall and a lower risk entry at today's prices. This macro-economic hedged approach discounts that the move higher in yields in the last few sessions has somewhat done the Fed's bidding regardless of when they raise rates.