John O’Connell.Tibor Kolley/The Globe and Mail
John O'Connell is chairman and CEO of Davis Rea. His focus is North American large caps.
Top Picks:
Artek Exploration Ltd. (RTK TSX)
Artek is a small oil and gas producer that has a number of missteps the past year that seem to have been corrected. They recently drilled the most prolific condensate Montney well ever in the highly desirable liquids-rich northeastern part of British Columbia. Further positive results are expected in the near future. Large land transactions in the area leave one wondering how long Artek may remain a public vehicle if success continues at the drill bit.
Google Inc. (GOOGL NASDAQ)
Google is a highly profitable and innovative player in all things that touch consumers and businesses. The company attracts the brightest and is fearless as it creates innovative products and services that continue to reshape how our economy functions and will function in the future. Trading at 18x next year's profits, you are buying a company at a market multiple but is growing 3x faster than the average company.
Kelt Exploration (KEL TSX)
Kelt continues to grow at industry-leading growth rates all the while living well within its means and respecting shareholder value. This is a rare commodity in the energy patch and deserves the premium valuation the company enjoys. Management of the company is amongst the best and we feel confident that they will use this time of extreme uncertainty to make the decisions that will reward investors over the mid-to-long term. Of note is that the production per share is up 90 per cent year over year, cash flow is up 286 per cent in the same period and the key commodity it sells is up 33 per cent. Nonetheless, the value of the company is unchanged.
Past Picks: December 5, 2013
Stanley Black & Decker (SWK NYSE)
Then: $79.77; Now: $94.88 +18.94%; Total return: +21.04%
Stryker (SYK NYSE)
Then: $73.16; Now: $9.64 +22.53%; Total return: +24.40%
Kelt Exploration (KEL TSX)
Then: $9.50; Now: $9.38 -1.26%; Total return: -1.26%
Total return average: +14.72%
Market outlook:
Equity markets are back on an upward track after the intermediate correction that occurred in October. We are now in the seasonally favourable part of the year for equity markets, and alongside ultra-low interest rates and rising earnings growth, this points to additional equity gains into the spring. The global, U.S. and Canadian economic expansions are continuing, indeed improving according to our indicators. However, unemployment remains high and inflation low which, combined with large debt, overhangs across the developed world and increasingly across the emerging markets suggesting that interest rates will be low for an extended period ahead. Short-term interest rates are likely to rise somewhat in the U.S. from their current setting just above zero. The improving U.S. economy and signs that the Federal Reserve's ultra-easy policy setting has fuelled speculation in many markets has prompted the Fed to wind down its bond-buying program and start discussing the timing of the first hike in the Fed funds rate. We believe that it will occur in mid-2015 and that short-term rates will rise to 1 per cent next year. Markets could become more volatile again as the first rate hike approaches.
The recent market selloff was relatively mild and has not changed the messages coming from our valuation indicators, which point to equity markets that are richly valued relative to their history. This is especially the case in the small- and mid-cap sectors in the U.S. market. In North America our valuation indicators point us towards the largest-cap part of the market, with an emphasis on large-cap U.S. medical device and large-cap technology names. In Canada, we believe that the energy sector is deeply oversold and likely to rebound in coming months. Outside North America we find the Indian, Chinese and Japanese equity markets attractive.