Mohsin Bashir is vice-president, investments at Stone Asset Management. His focus is North American large caps.
Top Picks:
Toronto-Dominion Bank (TD-TSX)
Among the Canadian chartered banks, TD has had the most success expanding into the U.S. through its retail banking footprint. Approximately 22 per cent of its adjusted earnings come from U.S. retail banking which provide good offset to domestic net-interest-margin headwinds. For investors seeking resilient yield in a low interest-rate environment, TD represents attractive value trading at 11.3x 2016 earnings. It recently increased its dividend 8.5 per cent to $0.51/share and maintains a healthy payout ratio of 50 per cent.
Qualcomm Inc. (QCOM-Nasdaq)
Over 80 per cent of phones connected to 4G networks are based on Qualcomm products. QCOM is the market-leader in baseband connectivity through its chipset and licensing segments. Challenges associated with China's National Development and Reform Commission (NDRC) antitrust investigation and OEMs under-reporting revenues are reaching resolution. Qualcomm carries $7.53/share (U.S.) in cash (after S-T obligations and dividend payments). Cash is the fuel that nourishes innovation through R&D and QCOM remains the dominant player in this area. Later this year, they begin testing their new Kryo processor to advance their premier line of chipsets. Net of cash, the stock trades at just 11.8x 2016 calendar earnings and management continues to demonstrate shareholder value through buybacks and dividend increases.
Carter's Inc. (CRI-NYSE)
Carter's is the best-rated and largest branded marketer in the U.S. of apparel exclusively for babies and young children. CRI continues to gain market share by catering to millennial parents who believe that good value is paramount when shopping for brands. 80 per cent of new moms shop at Carter's. The company recently reported record sales for 2014 and operational efficiency investments are expected to drive further profit margin expansion into 2015 and beyond. Some of CRI's catalysts include: 1) launching a new loyalty program, 2) expanding their e-commerce partnerships in India and 3) increasing their Canadian footprint by 80 stores over the next 5 years. The stock has a good runway to grind higher as lower input costs of cotton drive greater cashflows and management remains committed to return 50 per cent of free cash flow to shareholders. The company initiated a dividend in 2013 and has since increased it each year.
Past Picks: February 19, 2014
Union Pacific (UNP-NYSE) * Stock Split* 2 for 1 on June 9, 2014
Then: $175.87; Now: $117.78 +33.94%; Total return: +37.07%
Vermilion Energy (VET-TSX)
Then: $63.27; Now: $55.37 -12.49%; Total return: -8.62%
Robert Half International (RHI-NYSE)
Then: $40.74; Now: $62.45 +53.29%; Total return: +56.14%
Total return average: +28.20%
Market outlook:
Since the "Fearful Fall" of 2014 which saw the S&P/TSX composite and the S&P 500 experience peak-to-trough declines of 13 per cent and 10 per cent respectively, markets have basically recovered and continue to meander upward in the mid-cycle, yet to transition to the late stage of the business cycle where we would expect a rotation in market leadership from discretionary, industrial and technology sectors to resources. The world continues to punish the resource sector for grappling a mismatch between demand and supply and unfortunately the Canadian market will remain in the penalty box as a result. 2008 was the single most substantial market crisis since the Great Depression. The actions of central banks across the globe have been a true test of modern Keynesian economics. American QE has ended and European QE has begun. Intervention from central banks has stretched the business cycle elongating the path of global recovery. We could be at the point that the U.S. Federal Reserve is seeing enough positive economic data to begin the path back to normalized rates, but we would expect the pace to be very gradual. Interest rates are still well below their natural level of 3.5 per cent to 4.0 per cent suggesting that equity valuation multiples can continue to expand bolstered by solid earnings from the corporate sector. We continue to believe that being exposed to equity markets is the best way to participate in the economic recovery and we prefer companies with pristine balance sheets, lower variability and a propensity to reward shareholders with growing dividends.