Darren Sissons is managing director of Portfolio Management Corp. His focus is global large caps.
Top Picks:
BP PLC (BP-NYSE)
- 1) dividend currently yielding 4.5 per cent,
- 2) reasonable balance sheet,
- 3) attractively priced due to the Gulf of Mexico oil spill liability, which is now well-provisioned,
- 4) the Russian governance issues relating to the sold TNK asset have now been dealt with via the Rosneft investment, and
- 5) the portfolio is being re-jigged to focus on high impact exploration.
Keppel Corp. (KLSM SI /PK: KPELY-5)
- 1) has a progressive dividend, which has been raised for 23 consecutive years, that currently yields 3.6 per cent,
- 2) a strong balance sheet,
- 3) Keppel is levered to the offshore marine market as its Offshore & Marine division manufactures oil rigs and oil exploration platforms,
- 4) also leveraged to the wealth effect in China, Indonesia and Malaysia via its property development business, and
- 5) the company is attractively priced as oil majors have slowed offshore exploration investment in 2014 and due to the selloff in emerging markets. We note: Singapore is not an emerging economy as its GDP per capita is higher than Canada and the country is home to the largest population of U.S. dollar millions per capita.
Keppel operates in four segments:
- 1) Offshore & Marine (“O&M”), which drives the lion’s share of revenue and earnings and is active in the oil rig construction, shipbuilding, ship repair and ship conversion markets;
- 2) Property, which is primarily focused on residential property development across Asia and this division also owns and controls Keppel REIT, which manages Class-A type office real estate;
- 3) Infrastructure, which is active in environmental engineering markets via de-salination plants in Singapore and the Middle East and power generation via its gas co-generation electricity plants and waste-to-energy plants; and
- 4) Investments, which contains a number of high growth, small medium sized businesses
Wright Medical Group (WMGI-Nasdaq)
- 1) a pure play on the fast growing extremities market i.e. fingers, ankles and toes,
- 2) market expected to grow 13-15 per cent next year,
- 3) good balance sheet,
- 4) tuck-in acquisitions expected, and
- 5) turn around well advanced so 68-year-old CEO Bob Palmisano, who has made a career out of restructuring and selling his companies, could soon begin the process of selling the company.
Past Picks: April 24, 2013
BP PLC (BP-NYSE)
Then: $42.08 (U.S.); Now: $49.39 +17.37%; Total return: +23.28%
Kuehne & Nagel (KNIN-VX) In Swiss Franc
Then: CHF$105.80; Now: CHF$120.40 +13.80%; Total return: +17.50%
MTR Corp. (66-HK) In Hong Kong Dollars
Then: HKD$31.20; Now: HKD$29.55 -5.29%; Total return: -2.85%
Total return average: +12.64%
Market outlook:
We, as value investors, agree the U.S. recovery is continuing but are less optimistic about the upside for the American markets versus some of their peers. The key statistics we are currently following are: the broad measure of unemployment, new home construction and consumer spending. All are trending in the right direction but not as quickly as many market participants would like.
The Euro-zone has bottomed but we believe the market got a little ahead of itself last year. Consequently, we are now seeing earnings revisions or missed expectations for some of the cyclicals and the banking sector in particular so share prices are now falling back towards reasonable levels.
Japan is troubling us. We recognized the financial engineering – inflation strategy of Abenomics and the implicit export growth versus currency decline dynamic – but concerns around the overall debt levels of Japan and therefore the country's ability to maintain the financial engineering trade long enough to matter is what has kept us on the side lines.
Emerging markets and developed Asia on balance is where the opportunities lie for value investors right now. Latin America is likely still too early as agricultural and mining commodity prices have fallen significantly so earnings estimates continue lower. On the bright side, the World Cup followed by the Olympics is a plus. Additionally, Argentina has begun discussions (again) around restructuring its sovereign debt, which is typically a sign that a recession in Latin America is nearing bottom.
Going forward, I suggest some profit taking on U.S. cyclicals and investors should have sufficient dry powder for better opportunities in developed Asia and in Europe. A correction may or may not occur this year in developed markets but it should be welcomed when it does arrive as it will provide better entry opportunities for high quality companies in developed economies.