Mike Newton is director of wealth management & portfolio manager, Scotia Wealth Management. His focus is North American large caps & ETFs.
Top Picks:
Hamilton Capital Global Bank ETF (HBG-T)
Last purchase: Aug. 30 at $17.98
This Canadian-dollar denominated ETF has a diversified portfolio of 50 banks in 17 countries. It has an underlying yield of 3 per cent. Right now it has 40-per-cent exposure to U.S. banks with an emphasis on the mid-caps. It also has 25-per-cent exposure to European banks, with an emphasis on Northern European countries. Relative to the U.S and Canadian large-cap banks, HBG's northern European banks have higher dividend yields, and significantly higher capital ratios. This week, Citi analysts touted European banks as the "world's most contrarian trade" pointing out that European banks have never traded this cheap relative to U.S. banks. It also has exposure to banks in attractive countries like India. Lastly, the portfolio is overseen by Robert Wessel, a well-respected bank analyst who has specialized in the financial services sectors for over 20 years.
Whole Foods (WFM-Q)
Last purchase: Aug. 4 at $30 (U.S.)
Despite the increasingly difficult competitive backdrop, I am recommending this company now in the early stages of its aggressive repositioning strategy. Management is cutting prices, accelerating private brand penetration, aggressively reducing costs, enhancing marketing, investing in technology and rolling out a value format in 365 which has been well-received and could dramatically expand its new store opportunity. By investing now, you are picking shares up at a level when sentiment is clearly quite low (shares are down a whopping 55 per cent in three years). Whole Foods is not completely out of the woods yet, but I suspect an inflection point is likely in coming quarters. More recently, M&A activity has picked up in the space providing some support to the shares.
BofI Holding (BOFI-Q)
Last purchase: Sept. 27 at $22.62 (U.S.)
BofI Holding ("Bank of Internet") is an online bank with $7.6-billion in assets and 15-year history. It is known as the "branchless" bank operating out of a single physical office in San Diego. The bank doesn't have to worry about the cost of building, equipping and staffing branches. BOFI has some of the lowest expenses in the industry and some of the best profitability metrics. BofI generates 22.62 per cent ROE which is the 95th percentile of the banking industry. Now could be a great time to buy BofI due to unfounded accusations and a high volume of short-selling. Shares have fallen 35 per cent on these allegations and sport a 11.9 PE ratio with a very compelling growth rate. One of the big drivers for earnings over the past two quarters has been BofI's partnership with H&R Block. In 2015, the two companies reached an agreement for BofI to acquire the company's banking business, which it would operate. This past tax season was the first under this agreement and was the key driver behind the huge growth in BofI's non-interest income in its third and fourth quarters. Part of the agreement gives BofI exclusive right to offer H&R Block's customers other products it is working to integrate into its systems with those of H&R Block to more seamlessly support its ability to cross-sell.
Past Picks: Oct. 28, 2015
CCL Industries Inc. (CCL.B-T)
Then: $185.59 Now: $244.44 31.71% Total return: 32.79%
IAC/InterActiveCorp (IAC-Q)
Then: $65.87 Now: $62.15 -5.65% TR: -5.16%
Roper Technologies Inc (ROP-N)
Then: $184.20 Now: $181.22 -1.62% TR: -0.95%
Total Return Average: +8.89%
Market outlook:
With all that is happening in the world – the U.S. election, the Brexit vote, various terrorist incidents, speculation about rates – the market continues to stay resilient.
Although the sideways churn appears to be continuing for now, I believe a big move is coming soon. And you may be surprised by which direction I expect that move to play out. Equities around the world will prevail.
This month's ISM data release tied for the biggest beat relative to expectations of the entire recovery. Not only was the headline reading in September's ISM Services report strong, breadth was also extremely positive with 9 out of 10 subcomponents positive.
The economic data has improved to the point where a Fed rate hike in December may be warranted, but I am not so sure it will actually happen. We must welcome rate hikes, if and when they come, as this may be signalling rather decent economic news with higher stock prices to follow. This market will likely move sideways until election day but as election volatility heightens, study your favourite names and be prepared to buy on any dips in November, while at the same time practicing disciplined risk controls (Stop Losses) to prevent an outsized loss.