Don Lato is president of Padlock Investment Management. His focus is North American equities.
Latest purchase in early January at $98.56.
Apple continues to be the largest holding in Padlock's portfolios and was a Top Pick in my last BNN Market Call appearance in October. The stock has struggled since then, and last night's earnings release won't change that in the short term. One of the key points in the release was the service revenue within the Apple ecosystem that grew at 24 per cent year-over-year but seems to generate little value for the shareholder at this point. With cash of $39 (U.S.) per share and with earnings expected to be $9 plus this year, the stock is trading at a distressed security multiple of less than 7.0X ex-cash. This company is not Research In Motion; own the stock, collect your dividend — which will most likely increase in April — and check the price a year from now.
Aecon Group (ARE.TO)
Latest purchased in early January at $14.88
Aecon Group currently enjoys a multi-year backlog, and although it has derived 55 per cent of its revenue from Western Canada over the past year, it is well diversified beyond the energy sector. Current contracts, such as the Eglinton cross-town project, should produce strong profit growth in 2016 and 2017 with analyst earnings per share consensus for 2016 at $0.94 and growing to $1.21 in 2017 (or just under 12.0 times 2017 earnings at the current price.) With the new Liberal government's pledge to boost infrastructure spending, Aecon could be one of the leading beneficiaries of over the next several years, resulting in solid returns for its shareholders.
Parex Resources (PXT.TO)
Latest purchased in early January at $9.04.
This recommendation is not a call on the short-term price of oil but the expectation that oil prices will be higher in the future and that the financially strongest energy producers will stand to benefit. Although Parex's cash flows have suffered along with the rest of the industry, they have still managed to deploy that cash during 2015 to increase their production significantly and are guiding toward further increases in 2016, a rarity in the industry. With its strong management, zero debt, approximately $100-million (CAD) of cash, production costs of around $24/bl (U.S.) and finding costs among the lowest in the industry, Parex will be a survivor, and a purchase today should generate a very handsome return over the next three years.
Past Picks: February 19, 2015
New comments: Last purchased in early January at $713.
The stock is part of the FANG (Facebook, Amazon, Netflix, Google) that led the market in 2015. Revalued upwards during the year, Alphabet is no longer cheap, but it is a core holding and is not overvalued. Alphabet still dominates internet ad business and YouTube now meaningfully contributes to its bottom line.
Then: $542.87 Now: $699.99 +29.30% Total return: +29.30%
CCL Industries (CCLb.TO)
New comments: Last purchased in early January at $208.
CCL benefited from acquisition synergies on deals. One year ago, the 2016 estimate was $7.83, and it has now grown to $9.64. It will continue to benefit from a weak Canadian dollar to move to non-resource alternatives in Canada. It's no longer cheap, but expected earnings growth beyond 2016 should provide a reasonable return.
Then: $133.16 Now: $207.05 +55.49% Total return: +56.91%
NXP Semiconductors (NXPI.O)
New comments: Owned in U.S.-only portfolio. Caught in downtrend of Apple suppliers over the last few months. Its 2016 estimate is down 11 per cent from last year while the stock is down 17 per cent. It's more than just an Apple supplier, with huge presence in the auto industry, which will be aided as synergies from Freescale become apparent. Very attractive at 12.5x 2016 estimates.
Then: $85.67 Now: $70.65 -17.53% Total return: -17.53%
Total Return Average: +22.89%
After having gone into the year with modest but constructive expectations for equity markets, the sharp sell-off has not changed my overall view but has somewhat increased my expectations for returns from this point on. The decline and ensuing volatility has caused many market psychology readings to be at extreme levels of pessimism. Although quite unsettling, we have been through periods of declining markets in the past. No major declines are the same, but I continue to strongly feel that unlike 2000-01, when valuations were sky high and 2008-09, when the entire financial system was at risk of collapse, the current decline should not be considered a precursor to the major declines that we endured then.