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:
Concordia Healthcare (CXRX.O)
Concordia is a Canadian pharmaceutical company that owns and markets a variety of drugs. It has been painted with the same brush as another Canadian pharmaceutical company, Valeant, but is not plagued with any of the same issues. Concordia has recently announced the formation of a committee to review strategic alternatives, and rumours have been swirling about a potential buyout.
Independent of all the noise, the company is still well run, in good financial shape, and has many profitable products in the pipeline. They recently acquired Amdipharm Mercury, which provided them with both a large portfolio of pipeline products, diversification, and exposure to the international market. Despite having to increase leverage to close the deal, the business continues to generate strong free cash flow, which will enable them to pay down debt in a timely manner. It is trading extremely attractively right now relative to both the market and its comparables in the sector, and we believe that it presents a compelling opportunity.
Walt Disney Company (DIS.N)
Disney is a media and entertainment company with diversified revenue streams ranging from media and sports networks to movies, television, consumer products and amusement parks. Disney possesses incredible intellectual properties and franchises that are loved and continue to be monetized across different business lines. It has recently fallen out of favour over concerns regarding the potential impact of over-the-top media and skinny telecom bundles cutting into their sports and television network revenue, but we believe ESPN is still a high value property for the company.
Disney is reaping the benefits from the blockbuster release of the first Star Wars movie through merchandise sales and has still yet to scratch the surface of the revenue potential behind the franchise. The studio business is still firing on all cylinders, with the last two films released providing great results at the box office, an impressive summer slate of movie releases across their franchises and the release of another Star Wars movie at the end of the year. Disney continues to have success with their business model of capitalizing on their intellectual property across all business lines, as we have seen strong merchandise sales across their franchises — including Star Wars, Marvel and Pixar — and anticipate continued strength for the rest of the year.
Apple (AAPL.O)
Apple is one of the largest technology companies in the world. Despite reporting slowing sales in the last quarter, we continue to believe in the fundamentals of the company. We have continued to see the percentage of international sales grow over the years, and thus expose the company to significant foreign exchange headwinds. It is also in the process of ramping up its services sector and capitalizing on the revenue opportunity in its large and loyal ecosystem of over 1 billion users, which continues to see growth as customers switch from rival operating systems. We should continue to see expansion in iPhone revenues with the release of a new low-end product that should bolster sales internationally. We also believe that the slowing sales appear worse than they actually are due to tough comparisons and large numbers, especially in China. The company continues to see significant opportunity in India and China with the continued growth of the middle class, low product and LTE infrastructure penetration, and the introduction of both the new low-end iPhone and a potential new flagship phone later this year.
Past Picks: April 21, 2015
Brookfield Infrastructure Partners (BIP.N)
Then: $44.69 Now: $41.98 -6.06% Total return: -0.92%
McDonald's (MCD.N)
Then: $94.87 Now: $128.40 +35.34% Total return: +39.87%
Kelt Exploration (KEL.TO)
Then: $8.75 Now: $4.17 -52.34% Total return: -52.34%
Total Return Average: -4.46%
Market outlook:
Markets are generally fully valued, but pockets of value have been created because of a continued focus on 'shortermism' by investors. We feel that a profit recession is continuing as global growth remains stagnant. The recent weakness of the U.S. dollar, while providing some welcome relief for U.S. multinational corporations, is not sufficient to offset the overall global weakness. Stock buybacks that are masking the absolute drop in profits for many companies can only go on for so long, as companies are rapidly replacing equity for debt on their balance sheets at a time of heightened uncertainty about business longevity because of technological change and global competition. Commodity markets appear to have hit a bottom and should also help give a boost to industrials, but we expect this will be a muted cycle. Negative interest rates and flat yield curves continue to hurt financial profits at a time when technology is chipping away at the traditional models of banks. We continue to preach caution and feel that a defensive stance is warranted.