Paul Harris, partner and portfolio manager at Harris Douglas Asset Management
FOCUS: North American and global stocks
MARKET OUTLOOK:
The question now is what the world will look like in 2021 and beyond. While the vaccine development has certainly changed the outlook for the pandemic, its impact may be delayed by the escalating case numbers and the logistical challenge of its distribution, both of which might slow the economic and earnings recovery in the U.S. and Canada. Our best guess is that the U.S. and Canada will return to some semblance of normal by the fourth quarter of 2021. We do not, however, know what the new normal will look like. Will people travel as much? Will consumer behavior change? Will consumers behave as if the economy is in a depression or a recession? In a normal recession, most consumers forget the ill effects of the recession after about two years. With a depression, by contrast, consumer behavior is impacted for many years. This has implications for investing from commercial real estate, to internet infrastructure. We continue to believe that technology, healthcare, healthcare technology and consumer staples such as Amazon, Costco and Walmart will continue to do well.
TOP PICKS:
Amadeus IT Group SA (AMADY OTC)
Amadeus IT Group SA is a Spain-based company engaged in the provision of information technology (IT) services primarily for the tourism and travel industries. Two business segments: Distribution and IT solutions. The Distribution division offers Global Distribution System (GDS), a worldwide computerized reservation system (CRS) used as a single point of access for booking airline seats, hotel rooms and other travel-related services by travel agencies and travel management companies. The IT solutions division provides a range of technology solutions that automate core processes for travel providers. Its customers include full service carriers and low-cost airlines, hotel managers, rail operators, cruise and ferry operators, travel insurers and car rental companies, among others. Although this has been a difficult time for the company, management acted quickly to cancel its dividend, cut cost and issue equity and debt to shore up the balance sheet. The company has enough funds to last well into 2022.
Bank of America is one of the largest banks in the United States holding 10 per cent of all deposit in the country. The bank continues to reduce cost through reduction in headcount and technology. The company continues to improve its capital base with Tier 1 ratio at 12 per cent. The stock trades at 1.1 times book value and 13 times 2021 earnings. The company yield of 2.3 per cent. We think the intrinsic value of US$50 dollars, and will be buying back 2.9 billion in shares.
Zoetis is the largest public animal-health company. Zoetis was spun off from Pfizer in 2013. In 2018 U.S. pet owners spent US$15.5 billion on over the counter medicine and supplies and double 6.2 billion in 2001. Healthcare for animals has a certain advantage over health for humans. The industry doesn’t have content with pricing pressure from the insurance industry as most medical expenses are paid out of pocket. Developing drugs for pets, compared with for humans, is generally faster and less expensive, since it requires fewer clinical studies involving fewer subjects. Most companies try to find compounds that have worked in humans, so we don’t have to start from scratch. Generic drugs are less of a threat. The company has strong free cash flow growth, generating 1.6 billion in 2021, a strong balance sheet, covers interest on debt 19x and high conversion rates in free cash flow to net income.
PAST PICKS: January 8, 2020
TD Bank (TD TSX)
- Then: $73.86
- Now: $72.94
- Return: -1%
- Total Return: +4%
Lockheed Martin (LMT NYSE)
- Then: $411.03
- Now: $331.72
- Return: -19%
- Total Return: -17%
Johnson & Johnson (JNJ NYSE)
- Then: $144.96
- Now: $170.14
- Return: +17%
- Total Return: +20%
Total Return Average: +2%
| TD TSX | Y | Y | Y |
| LMT NYSE | Y | Y | Y |
| JNJ NYSE | Y | Y | Y |
Website: www.harrisdouglas.com