Mohsin Bashir is vice-president, investments at Stone Asset Management. His focus is North American large caps.
Top Picks:
The Kroger Company (KR-N)
Last purchase: April 19, 2016 at $34.58
The Kroger Co. operates retail and drug stores across the U.S.. It also manufactures and processes its own line of foods and products. The Kroger has emerged as the star of the US grocery industry over the past few years, gaining share in all markets versus competitors large and small. Its private label brand, SimpleTruth, provides an affordable organic option to its shoppers and has grown to $1.2-billion in annual sales just two years after launch. Approximately 48 per cent of its stores are owner-operated and the stores are under the banners such as Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, Gerbes, QFC, Ralph's and Smith's. Most recently, they purchased Roundy's in an $800-million deal.
Tricon Capital Group (TCN-T)
Last purchase: May 24, 2016 at $8.30
Demographics in the U.S. Sunbelt indicate secular tailwinds for single-family rental properties as millennials increasingly choose to prioritize experiences over asset-accumulation. Tricon Capital Group is an asset manager and principal investor focused on the residential real estate industry with over 21,000 single-family rental properties in this 'hot' region. This segment represents 50 per cent of Tricon's book which bodes to be a good source of net-asset-value (NAV) growth as margins expand through scale and refinement in operations.
Trancontinental (TCL.A-T)
Last purchase: May. 4, 2011 at $13.98
Arguably the 'last man standing' in the printing business, which is in secular decline thanks to the evolution of the digital age. However, many investors are overlooking their slow-and-steady transformation, and therein resides opportunity for patient investors who do not object to collecting a 4.1-per-cent dividend yield sustained by a 25-per-cent payout ratio. They are the best and lowest cost producers in the printing business which spins off over 10-per-cent free cash flow yield and despite the trends towards a paperless society, their printed flyers business across grocery and drugstore clients are highly impactful across multiple demographics – including millennials.
Past Picks: September 18, 2015
Magna International (MG-T)
Then: $65.85, Now: $50.00, -24.07%, Total return: -24.07%
DH Corp. (DH-T)
Then: $40.35, Now: $32.24, -20.10%, TR: -17.75%
Medtronic (MDT-N)
Then: $70.33, Now: $84.59, +20.28%, TR: +22.15%
Total Return Average: -6.56%
Market outlook:
It's a cruel summer with no shortage of events: Brexit, Fed rates, U.S. election, China economic slowdown, Migrants in Europe and Japanese currency woes to name a few. "Sell-in May & Please Stay Alert" could be the appropriate motto this summer. 2008 was the single most substantial market crisis since the Great Depression. We're still operating in the wake of it. The actions of central banks across the globe have been a true test of modern Keynesian economics. There was $1.8-trillion dollars sitting on corporate balance sheets as an unintended consequence of these actions. That capital started to get deployed, but where did it go? Buybacks! A record amount of share repurchases ensued over the past 24 months. Now that's all fine and good for supporting near-term or even next year's earnings, but it does little to support the long-term economic growth via return-on-invested-capital (ROIC). This results in negative business investment and is a significant contributor to the self-fulfilling prophecy of a 'lower-for-longer' economic growth environment.
The market needs its medicine in the form of higher interest rates and there is support that enough constructive economic data points related to labour and inflation exist to allow the U.S. Federal Reserve to begin the path back to normalized rates, but we still expect the pace to be very gradual. We continue to believe that being selectively exposed to equity markets is the best way to manage through the broad market volatility and we prefer companies with pristine balance sheets, lower variability and a propensity to reward shareholders with growing dividends.
Risks are coming from everywhere these days, but domestically as an oil-producing country, Canada will remain highly sensitive to the demand/supply dynamics of commodities. As fears surrounding currency wars, Brexit and lower-for-longer interest rates persist, gold and precious metals will continue to be dramatic outperformers on the index. Manufacturing sectors could benefit from a declining CAD, but freight indicators suggest this is not materializing fast enough to create meaningful positive GDP growth.
Currently at about 17 times price to earnings, the S&P 500 Index is not particularly cheap overall, but we do expect the market to be choppy this year, so we do anticipate potential periods of heightened volatility leading to buying opportunities to become available.