John O’Connell.Tibor Kolley/The Globe and Mail
John O'Connell is chairman and CEO, Davis Rea. His focus is North American large caps.
Top Picks:
Royal Bank (RY.TO)
Royal Bank continues to maintain its position as one of Canada's leading financial institutions. It has been firing on all cylinders across all business lines and continues to maintain a strong balance sheet and healthy capital position. Despite fears of oil related loans and weaker-than-expected capital markets revenue, Royal Bank has continued to maintain resilient growth in personal and commercial banking even in a tougher economic environment and has one of the strongest wealth management franchises among its peers. We expect that operating leverage will continue to increase and feel that the valuation premium to peers is justified based on strength and diversity of its operations and its steady dividend, which was just increased by 2.6 per cent to $0.79.
McDonald's (MCD.N)
McDonald's is a global fast food restaurant brand serving value-priced menu products in countries around the world. We continue to like the global reach and unparalleled brand power of the company, and we are optimistic about Steve Easterbrook's turnaround plans for the company. The company is in a transition phase right now as they restructure and realign the business but are showing signs of positive momentum towards improving operations and profitability. Sales numbers are beginning to turn around and combined with their operational initiatives (e.g. simplifying menu, refranchising stores and flatter organizational structure), should point towards improved profitability. It continues to trade at a discount to peers, while yielding 3.50 per cent in U.S. dollars. We like the transition story and are being compensated well while the company undergoes its transition.
Facebook (FB.O)
Facebook is a social networking company, but is much more than just social networking. We see it as one of the new leaders in Internet companies as it has steadily expanded from a pure social networking website to one that features strong potential for advertising revenues, growth in mobile payments and future technological improvements such as virtual reality. Despite incredible penetration of users and advertisements through the Facebook platform, we see impressive potential for user growth and advertising revenue growth through other Facebook owned platforms, such as Instagram and WhatsApp. With proven ability to monetize their products, continuing improvement in user growth and numerous pipelines for continued growth, we look at Facebook as one of the "four horsemen" of technology to own.
Past Picks: September 16, 2014
Apple (AAPL.O)
Then: $100.86; Now: $113.29; +12.32%; Total return: +14.24%
Google (GOOGL.O)
Then: $588.78; Now: $659.69; +12.04%; Total return: +12.04%
Spartan Energy (SPE.TO)
Then: $3.92; Now: $2.28; -41.84%; Total return: -41.84%
Total Return Average: -5.19%
Market outlook:
Despite our hopes for a quiet summer, the markets have been anything but quiet. An interest rate hike in the U.S. seemed to be all but certain until the recent sentiment driven selloff in global markets, triggered by fears of slowing Chinese growth, increased supply in the oil markets in Iran, and slowing global growth. The market has had an overreaction to China's devaluation and slowing growth but 7-per-cent growth in GDP year over year is still a huge number. China is in the midst of a transition from a manufacturing and goods based economy and is moving towards a service based economy and the PBOC continues to have tools at their disposal to reflate the economy. We have been seeing impressive volatility in the market, which we consider a positive as we have now experienced the first correction in about four years. The correction has allowed for valuations to come down somewhat from their loftier levels over the year and presents opportunities for bargains. The strength in the U.S. dollar continues to be a hurdle for companies globally as it drags on growth, but we are increasingly growing positive on the U.S. economy. We are also seeing faint signs of optimism in the energy sector as the supply response is beginning to roll through the market. Energy production is beginning to roll over and credit is increasingly becoming tighter as oil has plummeted back to the lows seen earlier this year. We continue to think the second half of the year will be challenging and that exercising caution would be prudent, but there are some signs of optimism on the horizon.