Zachary Curry is chief operating officer and portfolio manager, Davis Rea. His focus is North American large caps.
Spartan Energy (SPE-T)
Spartan's production per share grew 5 per cent in the last quarter, with cash costs down almost 10 per cent since Q3/14. The company will be updating its 2015 spending budget later in the year as it looks to spend within cash flow and maintain its below industry average debt load. We believe Spartan will be opportunistic with regards to any potential acquisition that would add value to its existing portfolio of assets. We think Spartan has a best-in-class management team.
Cisco Systems (CSCO-Q)
Cisco reported strong quarterly results recently, with growth in enterprise orders in North America and gross margins above 62 per cent. Increased growth in the services/software segments could result in even higher margins. Cisco is well-positioned to participate in increased capital spending and continued expansion of systems infrastructure around the globe. Cisco is committed to returning cash to shareholders via dividends (a current yield of almost 3 per cent) and stock buybacks.
Recent quarterly results beat our forecasts with strong content momentum in both the theatre and cable segments, with growth expected to continue in both segments. The company will be able to reap the rewards of elevated capital spending over the past few years – and participates in all segments of its proprietary content – such as merchandising and theme park activity.
Past Picks: July 14, 2014
Spartan Energy (SPE-TSX)
Then: $4.00; Now: $3.14 -21.50%; Total return: -21.50%
Then: $96.45; Now: $129.97 34.75%; Total return: +37.10%
Element Financial (EFN-T)
Then: $14.14; Now: $17.88 26.45%; Total return: +26.45%
Total return average: +14.02%
The global economy is growing slowly as we approach the mid-point of 2015, with global growth likely to be closer to 3 per cent than the 3.5 per cent that we expected. The second half of 2015 is likely to be stronger as the U.S. and Canada are likely to rebound after a weather and U.S. port strike-depressed start — with 2.5 per cent U.S. growth and 2.0 per cent Canadian growth likely. Emerging market economies continue to slow, particularly China, although they are likely to do better in second half of the year.
Rising oil prices are likely to lift headline inflation rates across the globe, but core or underlying inflation is likely to remain very subdued. The long-term trend remains toward U.S. dollar gains and Canadian dollar declines on the back of relative weakness in commodity prices. However, over the next 2-3 months there is room for the U.S. dollar to soften and the Canadian dollar and commodity prices to continue to recover after their sharp declines in the later part of 2014.
Short-term interest rates are likely to remain very low. Additional cuts could be coming in China and are likely in India as Chinese growth slows and India's inflation rate undershoots the central bank's target. A steady overnight rate in Canada at 0.75 per cent appears likely for the next year or longer. The U.S. Fed is prepping the markets for a rising Fed funds rate, but any increases are likely to be extremely gradual. It is very unlikely that the Fed funds rate (currently just above zero) will rise above 1 per cent in the coming year.
Subdued economic growth, low inflation and rock-bottom short-term interest rates will limit the upside for government bond yields. We expect 10-year U.S. and Canadian government bond yields to remain in a low range for some time to come. This will keep income-oriented investors reaching for higher yields in corporate bonds and equities. The recent increase in yields has made bonds, especially corporate bonds, more attractive for investors, although dividend yields remain very attractive in relation to interest rates and bond yields. However, the major equity markets remain very expensive and finding attractively priced companies is a challenge. Large cap information technology and health care stocks (especially medical equipment) in the U.S. appear fairly valued. The only bargains at the moment appear to be in the resources sector, notably the TSX energy sector.