John Stephenson.Della Rollins/The Globe and Mail
John Stephenson is senior vice-president and portfolio manager at First Asset Investment Management. His focus is on resource stocks and North American large caps.
Top Picks:
B/E Aerospace
Strong backlog driven by aftermarket demand: BEAV's largest end-market is the commercial aerospace aftermarket (40 per cent of total revenue). International airlines are in the process of re-initiating previously deferred cabin interior upgrade programs. We expect significant retrofit and upgrade work to come through in 2014 and BEAV should benefit tremendously from the trend.
P/E of 18.4x 2014E earnings
Wide body exposure: according to The Airline Monitor, wide-body aircraft deliveries are expected to grow at a 10-per-cent CAGR until 2016. BEAV's cabin equipment sale is driven by wide-body OEM production given these fleets have 6-10x more contents than narrow body aircrafts. BEAV's higher shipset content should lead to above-average growth and margin expansion.
Aerospace exposure warrants a premium valuation in the aero-upcycle: BEAV is trading at 15.7x 2015 P/E vs. North American peer average at 15.6x. BEAV usually trade at a premium to its peers during upcycles.
Bank of America
BAC enters 2014 with stronger margin, a lower core expense run-rate, improving credit, higher capital ratios, and significant leverage to a strengthening U.S. economy.
Cost-cutting initiatives to drive earnings: We see significant upside potential to drive BAC's earnings run-rate coming from the opportunity to cut costs, which we believe is under-appreciated by the Street.
Emerging capital return story: Over the next few years, we expect BAC will begin to catch up to its peers in returning a more significant proportion of its earnings to shareholders in the form of dividends and buybacks.
Best Buy
We believe the company presents a high reward opportunity to investors given:
- The new management team is re-energizing its work force and updating systems and processes. There are strong parallels to Home Depot’s turnaround several years ago.
- The levelling of the price environment through BBY’s “Low Price Guarantee,” which enables store associates to price match Amazon and other online competitors on customer request; and through the increase in the number of states where AMZN collects online sales tax, which should reduce the 6-9 per cent price differential between AMZN and BBY.
- The opportunity for BBY to reduce its North American G&A, which is currently running at 10-per-cent of sales. If BBY were to reduce its NA Corporate G&A to just 8 per cent from 10 per cent over time, the savings would equate to $800-million (U.S.).
Past Picks: March 4, 2013
Baytex Energy
Then: $42.91; Now: $41.63 -2.98%; Total return: +3.44%
Inter Pipeline
Then: $23.29; Now: $29.53 +26.79%; Total return: +33.06%
Pembina Pipeline
Then: $29.75; Now: $39.73 +33.55%; Total return: +40.18%
Total return average: +25.56%
Market outlook:
Markets are likely to be volatile for the next few weeks as uncertainty over the Ukraine overshadows the persistent worries in the market over a possible hard landing in China. Despite these concerns, economic growth in the United States and Canada remains strong and investors are encouraged to take advantage of any market weakness to add their favourite stocks in the financials, technology and industrial sectors of the market. The current earnings season has shown that the fundamental health of corporate North America is very strong and valuations remain reasonable, suggesting strong outperformance by stocks over the balance of the year.