David Driscoll is president and CEO of Liberty International Investment Management Inc. His focus is global equities.
Top Picks:
First Cash Financial Services (FCFS.O)
First Cash operates pawn shops in the southern United States, Mexico and other Latin and South American countries. This an alternative investment tied to the price of gold without owning a gold mining stock or the GLD Exchange Traded Fund (ETF). When gold prices rise, FCFS participates, as most of the items pawned are pieces of gold jewellery. Unlike the gold miners, FCFS has a solid balance sheet, generates free cash flow that funds its store build-out in Mexico and pays a small but growing dividend. The recent merger with Cash America makes it a bigger player in a fractured industry.
Last purchase was on August 16th at $51.97.
Novozymes A/S (NZYMB.DC)
It is a biotechnology-based company that makes enzymes for industrial use. The enzymes are used to allow for less laundry detergent per load, using cold water instead of hot, and with better cleaning results. The company has three new products that should reach the market in the coming years and drive future earnings growth: A probiotic for the poultry industry, a new corn inoculant for seeds and enzymes for the first full-scale bioplant in the world capable of treating waste, which should help reduce the amount of garbage that ends up in landfill sites.
Last purchase was on August 16 at 286.00 DKK.
Paychex (PAYX.O)
Paychex provides comprehensive payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States. The company's services range from calculating payroll and filing tax payments to administering retirement plans and workers' compensation. If interest rates rise, Paychex benefits as it gets to invest over $3-billion (U.S.) in payroll deductions from companies over a weekend before remitting it to the IRS. For every 0.25-per-cent rise in interest rates, Paychex makes $7.5-million in profit that goes straight to the bottom line, or about 3 cents a share.
Last purchase was on August 16th at $59.62.
Past Picks: June 7, 2016
Gemalto NV (GTO NA)
Then: €55.32 Now: €58.21 +5.22% Total return: +5.22%
Fomento Economico de Mexicano (Femsa) (FMX US)
Then: $95.32 Now: $95.75 +0.45% Total return: +0.45%
Novo-Nordisk NV (NOVOB DC)
Then: DKK 375.60 Now: DKK 311.60 -17.04% Total return: -16.23%
Total Return Average: -1.76%
Market outlook:
It appears that central banks have now painted themselves into a corner and can't get out. Investors are chasing yield in stocks because bond yields have gone negative, thus sending prices higher. Pity the banks that can't earn a return on their capital or the insurance companies that are hard-pressed to match their assets with liabilities because of the lower rate regime. I believe we are now at a crossroads where something's going to have to give.
If the stock market does weaken, here are some of the ways that investors can protect their portfolios:
- Hold non-correlated assets. Own one Canadian bank, not all of them. When the TSX fell in 2008, all the banks were down 40 per cent, not just one. Holding a diversified portfolio with non-correlated assets reduces downside risk.
- Now is a good time to re-balance stocks that are too heavy a weighting in the portfolio. For example, if you own 25 stocks, the average weight should be 4 per cent. If one represents 10 per cent of holdings, it’s always prudent to sell enough shares to bring the weight back to 4 per cent. Think of Valeant Pharmaceutical’s move from $325 to $37 today. Re-balancing would have secured the profits and prevented a big drop in portfolio value. Historically, re-balancing enhances long-term returns (20-year horizon) by 2 per cent, compounded.
- Re-balancing also gives you a cash cushion so you have some powder dry if the market corrects. If it keeps going higher, you’ll still participate in the gains. To me, that’s the best of both worlds – to participate in a rising market but have cash available if some world event occurs that sends the market lower.