JMRD Market Observer for February 12, 2016 – NBFM Monthly Equity Monitor – February 2016

February 12, 2016

**February 12th Issue of The JMRD Market Observer**

 

 In This Week’s JMRD Market Observer

 

  • JMRD Strategy Comments
  • NBFM Monthly Equity Monitor – February 2016
  • Information Technology: The winter of tech has arrived; recalibration required
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

 

JMRD Strategy Comments

 

It was another interesting week in the financial markets with no shortage of headlines to confuse investors.

 

We have been doing our best to communicate our thoughts to you individually through emails and phone calls as well as taking extra time preparing these weekly emails to give you an idea of what we are thinking and doing during this time.  In addition, we will be hosting a conference call next Friday to provide more information and commentary directly to you.  Feel free to let us know if you think there is something else we could be doing to help you as we work our way towards the end of this current market environment.  We are certain of one thing and that is that this increased volatility will end and it is only the timing that we do not know.

 

In general, since the start of the New Year we have been managing risks, it seems, more than returns.  It is one of those periods, and we have seen them before, where there are very few areas of the markets that are benefiting.   Even a well-diversified portfolio is fluctuating more than it should.

 

We have sold down some holdings in our baskets to hold higher levels of cash in order to cushion against some of the daily and weekly movements in the markets.  We will be re-committing those funds when certain areas of the market begin to stabilize.  This is not timing the market as much as it is risk management and revising the strategy based on the new information in the market.  The opportunities coming out of this period will likely be quite different than those that were showing strength leading up to the end of 2015.  There are interesting opportunities presenting themselves in some areas and we will be continuing to analyze them and see if they are appropriate for our client portfolios.  We do this always with a view towards the risk and reward trade off within a diversified portfolio.

 

In summary, we will continue to communicate with you and to manage risks as well as returns, as we always have.  In the meantime, feel free to let us know if there is anything else we can do for you.

 

Back to the conference call for a moment, it will be held at 3:00 pm next Friday February 19th so save that date and time.  Hopefully you can join us.  We will send along the agenda for this conference call early next week.

 

 

NBFM Monthly Equity Monitor – February 2016

 

NBF Economics & Strategy published its Monthly Equity Monitor for February. In addition to the points highlighted below, there is also no change to NBF’s sector allocation for the S&P TSX.

 

Highlights

 

  • The beginning of 2016 has turned out to be extremely testing for investors. Global equities plummeted in January after ending 2015 on a promising note. A number of indexes have fallen into bear market territory, rekindling fears of a global recession. China, Fed action and the widening of corporate bond yield spreads remain the focus of attention.
  • At the halfway point of the U.S. fourth-quarter reporting season, the news has been encouraging despite the challenges posed by a surging currency. Though aggregate Q4 earnings are still expected to come in lower than a year earlier, much of that decline is concentrated in commodity-related industries.
  • Prospects for a sizeable fiscal stimulus from Ottawa, coupled with an accommodative monetary policy and fairly strong U.S. consumer demand, are likely to help the Canadian economy get out of its funk. The outlook for overall earnings in 2016 is still one of improvement.
  • Our asset allocation is unchanged this month. Since we don’t think global growth is compromised, we are maintaining our recommendation to overweight equities relative to our benchmark. We continue to expect some softness in the USD, implying some lift for commodity prices in the coming months.

 

Equity Monitor

 

 

Information Technology: The winter of tech has arrived; recalibration required

 

CGI Group (Outperform; $63/sh target), Open Text (Outperform; US$55/sh target), Constellation Software (Outperform; $600/sh target), Kinaxis (Outperform; $50/sh target), Lumenpulse (Outperform; $20/sh target) and Sandvine (Outperform; $4/sh target) stand-out as top candidates to consider after the recent tech sell-off. Note that we are upgrading Constellation Software today to Outperform (was Sector Perform) and maintaining our $600/sh target price.

 

While high valuations had faded our excitement for most Canadian tech stocks, the recent sell-off brings several stocks back into our sights. The winter weather on Bay Street has been very mild, yet it’s a cold climate for tech stocks. The 13 stocks included in the S&P/TSX Composite are performing poorly; every stock is down YTD except CGI Group (Exhibit 1). The Nasdaq is underperforming the S&P/TSX miserably YTD notwithstanding plummeting energy prices. The S&P/TSX Information Technology sub-index is also underperforming the S&P/TSX Composite YTD. We believe that investors had been rotating cash into the tech sector resulting in stretched valuations, given the limited number of investible stocks in Canada. Over the past several weeks we are seeing this trade unwind. We don’t see the Canadian investable tech market improving much in 2016 as the IPO window looks closed for the time being. When money flows back into the tech sector, we believe some of these stocks are positioned to recover. At this point we’d stick to large cap stocks with a track record of strong cash flow, and very select small cap stocks that command a strong competitive position within a large end market.

 

Tech 2016 Outlook

 

 

JMRD Basket Corner

 

DIG Basket

 

Brookfield Asset Management (BAM.a) – Brookfield traded higher by 5% on Friday after announcing Q4 results. The company announced net income of $4.7 Billion in 2015 and $1.2 Billion in the Fourth Quarter. Funds from Operations were $2.6 Billion or $2.49 per Share for 201. In addition, the company increased the dividend by 8%

 

All-Cap Growth Basket

 

Constellation Software (CSU) – Constellation Software announced on Tuesday that it has entered into, through its wholly-owned subsidiary N. Harris Computer Corporation, a definitive agreement to acquire SIV.AG. SIV is the provider of utility billing, financial, and customer care outsourcing solutions for over 300 utilities and energy service providers throughout Europe.

 

First Service (FSV) – First Service reported strong Q4/15 results, with adjusted EPS of $0.28 above consensus of $0.26, and up from $0.13 last year. Consolidated revenues increased 12% to $316 million (in line) and adjusted EBITDA increased 67% to $22 million (up 20%, when Q4/14 EBITDA is adjusted for one-time items). The company reported year-over-year revenue and EBITDA growth across both business segments, FirstService Residential and FirstService Brands.

 

U.S. Growth Basket

Nasdaq (NDAQ) – Nasdaq announced on Friday it would buy Toronto-based news release distributor Marketwired for an undisclosed price. Marketwired, which distributes news releases and economic data to investors and media companies, has been owned by OMERS Private Equity, the private equity arm of one of Canada’s largest pension funds, since 2006.

 

 

Retirement Corner

 

 

 

Week at a Glance

 

Full report attached.

 

Week at a Glance

 

 

Reads of the Week

 

 

 

 

 

  • The Agony of High Returns (Motley Fool) – Even with a time machine, a lot of people wouldn’t want to own the best-performing stocks. 

 

 

 

 

 

 

Economic Reports

 

Monday February 15th – None – Canadian and US Markets are closed

Tuesday February 16th – Canada Manufacturing Sales and Existing Home Sales

Wednesday February 17th – US Housing Starts, US Industrial Production, Federal Meeting Minutes

Thursday February 18th – US Initial Jobless Claims, US Leading Indicators

Friday February 19th – Canada Retail Sales, Canada and US Inflation

 

 

Earnings Reports

 

Monday February 15th – None

Tuesday February 16th – Restaurant Brands, Russel Metals

Wednesday February 17th – Air Canada, Barrick, Bombardier, Constellation Software,

Thursday February 18th – Capital Power, Inter Pipeline, Riocan REIT, Superior Plus, Chemtrade Logistics

Friday February 19th – Enbridge, Enerplus. Deere and Co.

 

 

Have a good long weekend!

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