Three top stock picks from Sprott’s John Wilson

John Wilson is CEO, co-chief investment officer and senior portfolio manager at Sprott Asset Management. His focus is North American large caps.

Top Picks:

Long - NXP Semiconductors (NXPI NASDAQ)

Macro risk: major economic downturn cutting demand for autos and smartphones

Initiated: Nov. 25, 2013

1) Trades at 13x C2015E P/E while growing over 10 per cent with additional potential large growth opportunities over the next 2 years.

2) Secure ID is very large long-term growth opportunity with chip cards, contactless payment and mobile wallet.

3) Continue to improve market share and $ content inside the car (keyless entry, in-vehicle networking)

4) NXPI content in iPhone 6 is significantly larger than in iPhone 5 (Apple Pay) and could extend to iPad and iWatch franchises

5) Buyback for 10 per cent of shares underway

Recent news: beat CQ3/14 consensus revenue and eps estimates and raised CQ4/14 guidance

Downside risk: loss of design wins at Apple

Intercontinental Exchange Group (ICE NYSE)

Macro risk: Market volatility collapse shrinks global equity and derivative/futures volumes.

Initiated: July 25, 2013

1) Post completion of Euronext IPO, has completely delevered and started buying back shares. $450-million (U.S.) so far this year.

2) Ahead of plan on the realization of the NYSE/Liffe synergies. Increased to $265-million versus $240-million previously.

3) Those synergies mean they will grow earnings even without a pickup in volumes. (consensus sales up 5.9 per cent and EPS 25 per cent in 2015)

4) Open interest in futures is very high and operating leverage on higher volume is extremely high.

Recent news: ICE completes IPO of its Euronext unit

Downside risks: market volatility remains depressed, lowering option and stock market volumes.

Long - CGI Group (GIB.A TSX)

Macro risk: significant recession in Europe or U.S. meaningfully slows IT outsourcing contracts.

Initiated: January 29, 2013

1) Estimate 2015 Free Cash Flow yield over 10 per cent, valued at 13x C2015E P/E

2) Roughly 60 per cent of revenue from Europe, meaningful improvement in margins and cash flow as improvements in acquired Logica business take hold.

3) U.S. federal business remains slower than hoped for but offers upside as it normalizes in 2015/16.

Recent rews: Recently announced CQ3/14 cash flow and margins well ahead of street expectations.

Downside risk: reputational overhang from Obamacare website keeps sentiment on stock negative and/or impacts future bidding on U.S. government contracts.

Past Picks: February 11, 2014

Baytex Energy (BTE TSX)

Then: $40.40; Now: $30.64 -24.16%; Total return: -20.48%

General Motors (GM NYSE)

Then: $35.25; Now: $32.31 -8.34%; Total return: -5.93%

CGI Group (GIB.A TSX)

Then: $34.32; Now: $41.00 +19.46%; Total return: +19.46%

Total return average: -2.32%

Market outlook:

We continue to believe that the U.S. economy will demonstrate higher than expected growth through the second half of 2014 and carry that momentum into 2015. The labour market continues to improve in the U.S. and combined with lower prices for gasoline and rising consumer confidence should help consumption moving into next year. Republican control of Congress should finally allow legislative progress on key issues: taxes, energy, budget and debt ceiling. Key near-term risks are market volatility surrounding a change in Fed language as they move toward tightening bias next year or emerging market financial stress caused by rising U.S. dollar. China credit event or Japanese currency meltdown remain highest long term market risks in our view.