Back to Business THE ABC PERSPECTIVE

Transcription

1 THE ABC PERSPECTIVE Volume 28, No. 1 January 2017 Back to Business Since the conclusion and the unexpected result of the U.S. presidential election on November 8th, American common stocks have rallied significantly. At the same time there has been a meaningful decline in U.S. bond prices. These price changes are primarily due to the expectation of a new Republican pro-business government that will focus on fiscal stimulation, reflation, lower taxation and reduced government regulations. Regardless of one s political affiliations, the incoming Trump administration is in power for the next four years and appears to be headed towards a back to business agenda. Admittedly, some of the stock market optimism might already be factored into the elevated share prices since the election. While common stocks could be vulnerable to a healthy market correction we believe that the balance of 2017 should lead to more investment optimism and stock market outperformance. This view is bolstered by the intended pro-growth economic and fiscal policies of the new administration and relatively low, albeit, rising U.S. interest rates. If these policies materialize they should lead to improving American corporate profits and rising share prices. Over the past 12 months we have repositioned our ABC Funds portfolios toward medium and large capitalization U.S. securities while fully hedging our US/Canadian currency exposure. We have packed our portfolios with many liquid, dividend-paying, free cash flowing North American securities, which will provide both earnings and dividend growth in a relatively low interest rate environment. We believe that many of our selections are well-positioned for 2017 and a more positive economic and investment forecast. In fact, since the beginning of 2017, a number of our American holdings are starting to reflect this optimism via improved corporate results and, ultimately, higher stock prices since the 2016 year-end. They include: Amazon.com, Apple, Broadcom, Skyworks Solutions, Alphabet, Facebook, Netflix, Salesforce.com, Adobe Systems and Mastercard. In summation, with the inauguration of the new U.S. presidential team on January 20th, we expect greater financial and investment clarity leading to what we believe will be a continuation of North American economic growth and common stock appreciation. Although it is too early to evaluate the new administration, we are encouraged by its proposals regarding job creation, repatriating U.S. corporations overseas cash hoards and simplifying American taxation. Furthermore, we believe a shift from an exhausted monetary policy towards a more expansionary fiscal program should energize and elongate the current U.S. economic cycle.

2 TM Economic Perspectives Increasing Economic Optimism Although the new Trump administration has yet to assume government control we believe that its pre-election intentions including pro-economic, fiscal stimulation, lower taxation and less government regulation give us cause for increasing economic optimism. Granted, many pre-election promises versus actual elected government enacted policies can differ greatly. We sense, however, that many of the pro-business optics and intentions of the new administration are serious. In the event that many of these changes are carried out, the resulting effects, we believe, should provide enhanced economic, corporate and consumer confidence. Ultimately, this event should lead to a positive 2017 stock market performance. Investment Perspectives The Attraction of Common Stocks In all candour, U.S. common stocks are not deeply undervalued. However, with many dividend yields running at 2-3%, steady earnings and dividend growth, relatively low interest rates, the prospects for improving economic growth, a new pro-business presidential administration, we believe that American common stocks remain, quite attractive. Furthermore, when compared to low yielding short term paper and government bonds common stocks appear attractive, again, as a hedge versus the anticipated reflation and rising interest rates expected over the next 12 months. Moreover, in the event of lower taxation policies, reduced government corporate regulations and increased fiscal stimulation by the new Trump administration, liquid dividend-paying, free cash flowing American common stocks should be beneficiaries of any positive changes in investor sentiment. Portfolio Perspectives Well-Positioned for 2017 Looking ahead at our five ABC portfolios over the next 12 months we are quite optimistic. We continue to prefer good quality Canadian dividend-paying common stocks such as Trans Corp., Algonquin Power and Utilities, Fortis Inc. and Suncor compared to low-yielding, short-term paper and government bonds. More importantly, we believe that our medium to large capitalization U.S. equity holdings including Amazon.com, Apple Inc., Broadcom and MasterCard offer good relative value and earnings growth. It is our opinion that these selections present excellent prospective returns in a potentially volatile yet positive In addition they should perform comparatively well in a period of steady economic growth, mild interest rate increases and rising corporate earnings. We remain fully hedged on our U.S./ Canadian currency exposure and believe that we are wellpositioned for Page 2

3 CASH % 8.80% FINANCIAL SERVICES % 15.66% - CAD 3.96% Bank of America Corp. US 2.34% - USD 4.84% East West Bancorp Inc. US 2.5 MasterCard Inc., Class A US 2.70% CONSUMER DISCRETIONARY % 18.20% Prudential Financial Inc. US 2.40% Activision Blizzard Inc. US 1.66% Royal Bank of 1.23% Brunswick Corp. US 2.14% Visa Inc., Class A US 2.47% Nike Inc. US 1.8 Wells Fargo & Co. US 1.94% Six Flags Entertainment Corp. US 2.06% Starbucks Corp. US 1.1 REAL ESTATE % 1.84% Stingray Digital Group Inc. 3.60% Brookfield Property Partners L.P. 1.84% The Home Depot Inc. US 2.50% Uni-Select Inc. 3.17% ENERGY % 8.70% Inter Pipeline Ltd. 2.13% HEALTH CARE % 9.05% Keyera Corp. 1.56% Aetna Inc. US 2.44% Suncor Inc. 2.5 Amgen Inc. US 1.6 Trans Corp. 2.4 Becton, Dickinson and Co. US 2.61% Johnson & Johnson US 2.3 TECHNOLOGY Apple Inc. US 2.40% UTILITY % 6.14% Broadcom Ltd. US 3.35% Algonquin Power & Utilities Corp. 2.5 Microsoft Corp. US 3.06% Brookfield Renewable Partners L.P. 1.03% NVIDIA Corp. US 1.91% Fortis Inc. 2.53% INDUSTRIAL PRODUCTS % 10.07% CONSUMER STAPLES CCL Industries Inc., Class B 3.13% CVS Health Corp. US 1.8 Exco Technologies Ltd. 3.33% Loblaw Companies Ltd. 3.21% General Electric Co. US 1.27% Metro Inc. 1.4 Honeywell International Inc. US 0.63% PepsiCo Inc. US 1.71% Waste Management Inc. US 1.71% The Kraft Heinz Co. US 2.5 Utility Utilities 6% 15% 60% 40% Real Estate 11% 11% Care 10% 1 Page 3

4 CASH % 8.17% CONSUMER DISCRETIONARY % 23.73% - CAD 0.8 Activision Blizzard Inc. US 1.53% - USD 7.2 Amazon.com Inc. US 2.60% Aritzia Inc. 0.8 HEALTH CARE DHX Media Ltd., Class B 1.4 Aetna Inc. US 2.30% Electronic Arts Inc. US 1.4 Amgen Inc. US 1.4 Netflix Inc. US 1.3 Becton, Dickinson and Co. US 2.63% Nike Inc. US 2.6 Boston Scientific Corp. US 1.93% O'Reilly Automotive Inc. US 1.3 Regeneron Pharmaceuticals Inc. US 0.93% Stingray Digital Group Inc. 4.15% The Home Depot Inc. US 2.61% CONSUMER STAPLES Uni-Select Inc. 3.67% CVS Health Corp. US 2.1 Loblaw Companies Ltd. 3.17% ENERGY % 9.10% The Coca-Cola Co. US 1.3 Enbridge Inc. 2.3 The Kraft Heinz Co. US 1.95% Inter Pipeline Ltd. 1.5 Suncor Inc. 2.76% INDUSTRIAL PRODUCTS % 8.01% Trans Corp. 2.43% CCL Industries Inc., Class B 2.34% Exco Technologies Ltd. 4.65% MATERIALS % 1.81% Honeywell International Inc. US 1.0 Polaris Materials Corp. 1.81% FINANCIAL SERVICES % 13.30% REAL ESTATE % 1.74% Bank of America Corp. US 2.26% Brookfield Property Partners L.P. 1.74% East West Bancorp Inc. US 2.91% MasterCard Inc., Class A US 2.94% TECHNOLOGY % 13.53% Morgan Stanley US 2.16% Alphabet Inc., Class A US 2.37% Royal Bank of 1.3 Apple Inc. US 2.5 Visa Inc., Class A US 1.65% Facebook Inc. US 1.36% Microsoft Corp. US 3.1 UTILITY % 2.71% Salesforce.com Inc. US 1.3 Brookfield Renewable Partners L.P. 1.11% Skyworks Solutions Inc. US 2.64% Emera Inc. 1.60% Utility 3% 13% 6 3 Materials Real Estate 13% Care 24% Page 4

5 CASH % 5.55% HEALTH CARE % 7.56% - CAD 1.11% Allergan plc US 1.04% - USD 4.44% Anthem Inc. US 2.20% Boston Scientific Corp. US 1.8 CONSUMER STAPLES % 8.55% Gilead Sciences Inc. US 0.9 Costco Wholesale Corp. US 1.14% Regeneron Pharmaceuticals Inc. US 1.5 CVS Health Corp. US 1.5 PepsiCo Inc. US 2.15% UTILITY % 4.00% The Kraft Heinz Co. US 2.0 Algonquin Power & Utilities Corp. 2.21% The Kroger Co. US 1.66% Emera Inc. 1.7 INDUSTRIAL PRODUCTS % 7.15% FINANCIAL SERVICES % 19.35% General Electric Co. US 2.4 First Republic Bank US 3.0 Honeywell International Inc. US 1.87% Goldman Sachs Group US 1.34% The Boeing Co. US 2.86% MasterCard Inc., Class A US 2.86% Prudential Financial Inc. US 2.7 CONSUMER DISCRETIONARY % 22.83% SVB Financial Group US 3.17% Activision Blizzard Inc. US 1.60% The Toronto-Dominion Bank 1.30% Amazon.com Inc. US 2.74% Visa Inc., Class A US 2.87% AutoZone Inc. US 0.9 Wells Fargo & Co. US 2.07% Electronic Arts Inc. US 1.86% Netflix Inc. US 1.2 REAL ESTATE % 1.74% Nike Inc. US 2.74% Brookfield Property Partners L.P. 1.74% O'Reilly Automotive Inc. US 3.17% Six Flags Entertainment Corp. US 2.23% TECHNOLOGY % 16.84% Starbucks Corp. US 1.24% Alphabet Inc., Class A US 2.55% The Home Depot Inc. US 2.75% Apple Inc. US 2.8 Uni-Select Inc. 2.23% Broadcom Ltd. US 3.5 Facebook Inc. US 1.4 ENERGY % 6.43% Microsoft Corp. US 3.45% Enbridge Inc. 2.23% NVIDIA Corp. US 1.9 Suncor Inc. 2.31% Salesforce.com Inc. US 1.0 Trans Corp % Utility Utilities 4% 5% 6% 1 Real Estate 83% 17% Care 7% 23% Page 5

6 CASH % 10.35% CONSUMER DISCRETIONARY CAD 4.3 Activision Blizzard Inc. US USD 5.97% Amazon.com Inc. US 2.96% AutoZone Inc. US 1.56% CONSUMER STAPLES Brunswick Corp. US 3.66% CVS Health Corp. US 1.15% Dave & Buster's Entertainment Inc. US 3.4 Loblaw Companies Ltd. 3.00% Electronic Arts Inc. US 2.33% Mondelez International Inc. US 1.93% Netflix Inc. US 1.1 The Coca-Coca Co. US 1.34% Nike Inc. US 1.7 Stingray Digital Group Inc. 3.2 FINANCIAL SERVICES The Home Depot Inc. US 2.1 BB&T Corp. US 1.9 Uni-Select Inc. 3.33% MasterCard Inc., Class A US 2.30% Morgan Stanley US 2.3 TECHNOLOGY SVB Financial Group US 2.4 Alphabet Inc., Class A US 1.90% The Toronto-Dominion Bank 1.33% Apple Inc. US 2.84% Visa Inc., Class A US 2.97% Facebook Inc. US 2.5 Salesforce.com Inc. US 1.45% HEALTH CARE Skyworks Solutions Inc. US 2.84% Anthem Inc. US 2.91% Becton, Dickinson and Co. US 2.80% UTILITY % 3.96% Boston Scientific Corp. US 3.05% Algonquin Power & Utilities Corp. 2.41% Celgene Corp. US 2.85% Emera Inc. 1.55% Gilead Sciences Inc. US 1.81% ENERGY INDUSTRIAL PRODUCTS % 4.71% Inter Pipeline Ltd. 1.8 CCL Industries Inc., Class B 2.6 Petrowest Corp. 2.11% Exco Technologies Ltd. 2.03% Suncor Inc. 2.3 Trans Corp. 2.11% Utility 4% 13% 3 10% 6 1 Care 13% Page 6 5% 27%

7 CASH % 8.93% CONSUMER DISCRETIONARY % 19.17% - CAD 1.7 Activision Blizzard Inc. US 1.56% - USD 7.21% Amazon.com Inc. US 2.16% Dave & Buster's Entertainment Inc. US 2.07% UTILITY % 4.70% DHX Media Ltd., Class B 0.3 Algonquin Power & Utilities Corp. 2.4 Electronic Arts Inc. US 1.25% Fortis Inc. 2.21% Netflix Inc. US 1.26% Nike Inc. US 0.86% CONSUMER STAPLES % 6.31% O'Reilly Automotive Inc. US 1.8 CVS Health Corp. US 1.0 Six Flags Entertainment Corp. US 3.40% Loblaw Companies Ltd. 2.54% The Home Depot Inc. US 1.64% The Coca-Cola Co. US 1.27% Uni-Select Inc. 2.6 Walgreens Boots Alliance Inc. US 1.41% MATERIALS % 1.95% INDUSTRIAL PRODUCTS % 8.67% Polaris Materials Corp. 1.95% CCL Industries Inc., Class B 2.15% Exco Technologies Ltd. 4.05% HEALTH CARE The Boeing Co. US 2.47% Aetna Inc. US 2.2 Amgen Inc. US 1.66% TECHNOLOGY Becton, Dickinson and Co. US 2.50% Adobe Systems Inc. US 2.94% Boston Scientific Corp. US 2.45% Alphabet Inc., Class A US 1.80% Celgene Corp. US 1.1 Apple Inc. US 2.65% Regeneron Pharmaceuticals Inc. US 1.50% Broadcom Ltd. US 3.3 Facebook Inc. US 1.31% REAL ESTATE Salesforce.com Inc. US 1.17% Brookfield Property Partners L.P. 1.7 SAP SE ADR US 1.8 FINANCIAL SERVICES % 12.50% ENERGY Bank of America Corp. US 2.35% Keyera Corp. 2.1 East West Bancorp Inc. US 2.5 Petrowest Corp. 2.40% First Republic Bank US 2.0 Suncor Inc. 2.4 MasterCard Inc., Class A US 2.85% Trans Corp. 2.3 Royal Bank of 1.27% Visa Inc., Class A US 1.35% Utility 5% 1 67% 33% Materials Real Estate 6% Health Care 1 15% 1 Page 7

8 TM Three Favoured Abc common Stock holdings CCL Industries Inc., is a Toronto-based global leader in label and packaging solutions for large corporations and small businesses. The company has a vast distribution network operating 119 facilities in 31 countries. In December 2016, CCL announced the transformational acquisition of the Innovia Group of Companies for $1.13 billion. This acquisition will introduce CCL into the polymer banknote market, a new market for CCL with a strong growth trajectory. Innovia will be accretive to CCL by adding new manufacturing capabilities, unique technologies and will allow for cross-selling opportunities. We see continuing growth for CCL, driven by strong end markets, margin expansion, further acquisitions as well as solid organic growth. Electronic Arts Inc., develops, markets, publishes, and distributes games, content, and services for a wide variety of platforms. We believe Electronic Arts will continue to be a solid investment for several reasons. Firstly, the global video game industry is a thriving market, with global growth expected to be nearly 5% a year through Secondly, EA is one of the largest companies in the industry, and publishes popular franchises including Battlefield, Star Wars, FIFA and Madden. Thirdly, the video game industry is currently undergoing a shift from physical media to digital. Digitization produces lower costs, higher margins and enables companies to sell additional services online. Overall, Electronic Arts has many growth opportunities, including the development of new franchises, the integration of updated technology such as virtual reality, and the increasing popularity of e-sports. Loblaw Companies Ltd., is a leading and well-managed Canadian grocer selling under its Loblaw, PC, Shoppers Drug Mart and Joe Fresh brands. The company, after the purchase of Shoppers Drug Mart, became the foremost pharmacy retailer in. More importantly, with its huge distribution network of over 2400 grocery and pharmacy stores, Loblaw provides a wide selection of consumer staples and should be a major margin beneficiary of corporate cost cutting and increased company synergies. Looking forward, we see Loblaw s continued success due to a large range of retail formats of both food and drugs enabling the company to grow market share. Continued cost-efficiency initiatives should drive double digit EPS growth and rising free cash flows will permit Loblaw to repurchase a significant amount of shares through corporate buybacks. Administrative Information All cheques are to be made payable to RBC Investor Services. All client requests are to be directed to ABC Funds. Please ensure you update our office with any address or address changes to ensure you receive our correspondence. Only unitholders of the Global Equity Fund within non-registered accounts will receive T3 tax slips by the end of March as there was a distribution in Unitholders of our other funds will not receive T3 tax slips for T4s will be mailed out mid-february. The Capital Gains/Losses Report for redemptions made in 2016 is included with your statement. Contribution slips for RRSP contributions made in 2016 will be mailed at the end of January Contribution slips for RRSP contributions made in the first 60 days of 2017 will be mailed by the end of March The RSP contribution deadline for 2016 contributions is February 28, All contributions must reach our office no later than this date. RBCITS is the custodian of the ABC Funds and is responsible for providing account statements to all our clients. We ask that you retain these statements for your records as there may be additional costs for retrieving historical data. This newsletter is published by I.A. Michael Investment Counsel Ltd. and the ABC Funds 18 King Street East, Suite 1010 Toronto, Ontario M5C 1C4 Telephone: (416) Toll Free: OPEN ABC Fax: (416) Web site: info@abcfunds.com The information contained in this investment letter is not and under no circumstances is to be construed as a solicitation or recommendation to buy or sell securities, including, without limitation, any units of any of the ABC Funds. While the information contained in this newsletter has been drawn from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor in providing it does I.A. Michael Investment Counsel Ltd. assume any responsibility or liability. I.A. Michael Investment Counsel Ltd., its directors, officers, and other employees may, from time to time, have positions in securities mentioned in this letter. I.A. Michael Investment Counsel Ltd. is the manager and investment advisor of the ABC Funds, and as such, receives from the Funds certain management and investment advisory fees based on the net asset value of the Funds from time to time. Irwin Michael is the sole shareholder of I.A. Michael Investment Counsel Ltd.