Bruce Tatters is chief investment officer of Triumph Asset Management. His focus is North American large caps.
Top Picks:
Suncor (SU.TO)
We believe oil prices have bottomed and have begun a slow process of normalizing around the $60-$70 (U.S)/bbl. range. Suncor went into the significant downturn in energy prices in a strong balance sheet position and was able to take advantage of the low prices through the Syncrude interest acquisitions. Strong companies that make counter-cyclical acquisitions create tremendous value for shareholders on subsequent commodity upswings. Suncor's strong emphasis on operations excellence and cost reductions during the downturn will power cash flows as oil prices recover. Most recently, the stock has been held back by the wildfire situation in Alberta, which has affected its operations. We expect the stock to recover as operations return to normal over the balance of the year. We have an intrinsic value of $50/share, which is nearly 40-per-cent higher than where the stock currently trades.
Canadian Pacific Railway (CP.TO)
CP is one of Canada's two exceptional railroad companies and has more commodity hauling exposure than CN Rail. Despite the weakness in commodity and overall freight volumes, CP will grow earnings by over 10 per cent this year through a combination of continuous cost reductions and share buybacks. An improvement in the North American economy combined with improving commodities markets should accelerate earnings growth in 2017. CP is currently trading at 15.5x 2016EPS, below the TSX Multiple of 19x; our 12-month value on CP is $210 or a return of 23 per cent.
Bank of America (BAC.N)
Bank of America is one of the largest money centre lending institutions in the U.S. with a global presence. Recovery in all aspects of U.S. lending areas will continue and possibly accelerate in 2016. A key impediment to profit growth in the U.S. banking industry has been the zero rate policy of the Federal Reserve (impairs bank spread business). We expect the Fed to gradually normalize rates in the U.S. for the next several quarters. BAC trades below tangible book value and at a significant discount to the market earnings multiple at 11x 2016 EPS, and at a time when a 1-per-cent lift in interest rates across the yield curve would lift earnings by 30 per cent. Our 12-month valuation puts BAC at $20, or a return of +35 per cent.
Past Picks: July 15, 2015
Bank of America (BAC.N)
Then: $17.68 Now: $14.88 -15.84% Total Return: -15.02%
Sirius XM Canada (XSR.TO)
Then: $5.69 Now: $4.61 -18.98% TR: -11.05%
Apple (AAPL.O)
Then: $126.82 Now: $100.35 -20.87% Total Return: -19.25%
Total Return Average: -15.10%
Market outlook:
North American markets will be strongly affected by both Federal Reserve policy action and U.S. elections. We remain constructive on markets and believe that the recent improvement in commodities markets are a positive sign. Weakness in corporate earnings troughed in the first quarter and will rebound throughout the balance of 2016 and into 2017. Look for cyclical stocks, both industrial and commodity, to outperform. Global growth expectations will recover into the second half of 2016 with the improvement in commodities and continued global central bank policy stimulus. Canadian growth should also recover as commodity prices, and particularly oil prices, recover .