John O’Connell.Tibor Kolley/The Globe and Mail
John O'Connell is chairman and CEO of Davis Rea. His focus is on North American large caps.
Top Picks:
Kelt Exploration (KEL TSX)
Kelt is a fast growing, strongly financed and liquids rich gas producer with a highly accomplished management. The company reports its 2nd quarter results August 12 and we expect they have exited with about 11k boe/d of production. We believe the company can easily achieve 18.5k boe/d by this time next year without acquisitions and only a 60-per-cent chance of success in their drilling program. These are very conservative assumptions. We believe that one year from today the company can be trading at $18, producing an expected return of 45 per cent.
Element Financial (EFN TSX)
Element is a rapidly growing finance company that gives investors exposure to the leasing business in North America. The recent purchase of PHH in the United States gives the company many opportunities to achieve efficiencies and further grow the business. They have strong strategic alliances with manufacturers such as Trinity Industries which is a maker of rail cars for the oil industry. The company is trading at market multiples but will grow faster than the average finance company. We believe that the company will consider paying a dividend next year which will bring in a new breed of shareholders. We believe one year out the company can be trading at $18, producing an expected return of 30 per cent.
McDonald's (MCD NYSE)
McDonald's is a leading supplier of owned and franchised restaurants globally. Presently investors are focused on competitive pricing, global turmoil upsetting certain of its markets (Russia) and food supply chain issues (China). We believe these are temporary phenomena that investors will be well compensated for with the 3.5 per cent dividend. The company can be expected to continue to be shareholder friendly with stock buy backs and dividend increases which should result in the company trading at $103 providing for a sound total return of 15 per cent.
Past Picks: September 6, 2013
Cisco Systems (CSCO NASDAQ)
Then: $23.55; Now: $25.23 +7.13%; Total return: +10.48%
Intel (INTC NASDAQ)
Then: $22.6;7 Now: $33.02 +45.66%; Total return: +50.73%
Google (GOOGL NASDAQ) *Google Stock Split – GOOG & GOOGL
Then: $879.58; Now: $577.25 +31.13%; Total return: +31.13%
Total return average: +30.78%
Market outlook:
Equities have taken a more cautious tone recently and we feel this is a good longer-term development. Investors are evaluating whether a strengthening labour market and good economic numbers generally will cause the Federal Reserve to tighten monetary policy sooner than previously expected. We believe hikes to interest rates are not imminent but the debate will likely intensify as the year progresses. Large amounts of leverage and possible investor complacency has set the stage for increased volatility as these competing attributes of stronger growth and possible rising interest rates are processed in investors' minds. We believe that earnings will continue their good growth path and as long as wage growth remains moderate enough that corporate margins are not squeezed, equities can continue to produce acceptable returns. As always investors should hold adequate sums of cash to finance purchases of good companies that may experience temporary setbacks.