We still think the biggest opportunities are in Energy. In 2015, the S&P Canadian Energy Sub Index was down about 50% therefore to get back to the same level the index would need rebound 100% but it is only up 42% in 2016. While it is difficult, if not impossible to predict the price of oil, it appears to us that the low was set back in February 2016 in the high $20's. Today oil is trading in the high $40's. During this time, companies have gotten leaner by shutting down projects and laying off excess labor so if oil can hold its price then we think stocks can move higher on better results. If oil can rise we can see even bigger gains in Energy stocks.
Consumer stocks are looking expensive in our work, but we have seen many of those stocks roll over from their highs so we are looking an opportunity in consumer stocks soon. Surprisingly to us the market has reacted positively to Donald Trump being elected and has given new life into drug stocks since he has as much softer stance on drug pricing vs. Hillary Clinton. Overall, the market has reacted positively to President elect Donald Trump so we can see the market continuing higher for the rest of the year. However, we would be much more cautious once he is sworn in and reality begins to set in.
3) Top Picks
SU - Suncor. Disclosure. Personal NO. Family. NO. Portfolio/Fund NA
Suncor is a high quality company with a good long term track record. Recently the results have been weak but that should reverse itself as Energy prices have firmed up. The valuation is reasonable and the Company pays a 2.7% dividend yield at current prices.
BWA (NYSE) - Borg Warner. Disclosure. Personal NO. Family. NO. Portfolio/Fund NA
Good Company with a well balanced international distribution of revenue. 38% of revenue is in Europe, 34% is in Americas and 28% in Asia. Since the Auto sector restructuring in 2009 return on capital has been steadily improving from 1% to 17% in the trailing four quarters. The stock is down 15% in the past 12 months as some investors felt we hit a peak in auto sales worldwide. While we may have hit a peak in auto sales the results are still really good and worldwide sales are not expected to drop significantly but just soften a little bit.
MTY - MTY Food Group. Disclosure. Personal NO. Family. NO. Portfolio/Fund NA
Franchiser operating in quick service food industry with many brands Canadians would recognize. Some of the brands include: Mr. Submarine, Extreme Pita, Manchu Wok, Much Burrito, Vanelli's and many more. The business model is primarily as a franchiser allowing them to keep their capital invest low and achieve a return on capital is 87% in the trailing four quarters. The company is growing the number of brands and their footprint in Canada and Internationally. Furthermore, we think the shares are undervalued given the high growth and high return on capital.