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  • U.S. EqUitiES GUidEd Portfolio

    U.S. EqUitiES GUidEd Portfolio

    March 2008

    Nesbitt BurnsBMO R

    Portfolio, Action & Research Team

  • Nesbitt BurnsBMO R

    U.S. Equities Guided Portfolio March 2008

    IntroductionThe U.S. Equity Guided Portfolio represents what we believe to be a list of core U.S. holdings that make up a diversified portfolio. Our recommendations are based on research provided by various sources, including Bear Stearns, BMO Capital Markets, ISI Group, and S&P Advisor Insight, among others sources. The portfolio consists of 20 equal-weighted positions. Sector allocation is determined by the number of recommendations in each industry sector and our benchmark is the S&P 500. When selecting individual stocks for the portfolio, we focus on those with strong fundamentals, good liquidity and attractive valuation. Ideally, we look for stocks that are rated positively by at least one of our research providers. As with any portfolio, we have been and will be tracking returns, with return data published in Table 2 on Page 24.

    Our overall outlook for the U.S. market remains favourable. BMO Economics believes the U.S. has entered into a mild recession, but economic growth will resume in the second half of the year. Valuations for the U.S. market are very attractive, with the S&P 500 trading at only 14.7x 2008 EPS, which is one of the cheaper markets in the world. The outlook for U.S. corporations is positive, with strong balance sheets and reasonable earnings growth. Lastly, with the recent sell-off, sentiment for the U.S. market is very low and any incremental good news, such as an improving economy, further interest rate cuts or additional liquidity, and continued strong corporate earnings, could result in a significant move higher. BMO Capital Markets currently has a one-year target price for the S&P 500 of 1500.

    From a company perspective, we continue to favour large cap multinational companies due to their global exposure. These companies are benefiting from a weaker U.S. dollar and global diversification, as they are less dependent on the U.S. economy. In addition, large cap stocks have underperformed over the past several years, resulting in attractive valuations.

    From a sector perspective, we favour Consumer Staples due to the sectors global diversification, its stable earnings growth, strong balance sheets and attractive dividend yields. We are also overweight the Technology sector, as it tends to outperform in a macro environment that is looking toward the next recovery; it benefits from the weaker U.S. dollar, as over half of the sectors earnings are derived overseas. While the sector has not performed well over the past few months, the four names in the U.S. Equities Guided Portfolio continue to have good fundamentals and growth outlooks, and are trading at some of the cheapest valuations in several years. We also like the Industrial sector, as global infrastructure development and global growth is a key long-term theme. We look for names with high international exposure that will benefit from increased wealth in developing economies.

    u.s. equities guided portfolioAMEriPriSE FinAnciAl (AMP) ................................................. 3APPlE inc. (AAPl) .................................................................... 4ArchEr-DAniElS-MiDlAnD co. (ADM) .................................... 5BoEinG (BA) ............................................................................. 6cAtErPillAr (cAt) .................................................................... 7ciSco SyStEMS (cSco) .............................................................. 8cVS/cArEMArk corP. (cVS) ..................................................... 9EStEE lAUDEr (El) ................................................................... 0GEnErAl ElEctric (GE) .......................................................... hAlliBUrton co. (hAl) ........................................................ 2MArkEt VEctorS AGriBUSinESS EtF (Moo) .......................... 3MAttEl inc. (MAt) .................................................................. 4mckesson corp. (mck) ......................................................... 5nASDAq oMx GroUP inc. (nDAq) ......................................... 6nokiA corP. (nok) ................................................................. 7orAclE corP. (orcl) .............................................................. 8PEPSico inc. (PEP) .................................................................. 9United parcel service inc. (Ups) ...................................... 20Walt disney co. (dis) .......................................................... 2WyEth (WyE) ......................................................................... 22 deletions: AltriA GroUP inc. (Mo), AMGEn (AMGn),

    BAnk oF AMEricA (BAc)

    additons in bold

    Please refer to Pages 26 to 27 for Disclosure Statements.

    portfolio strategyMichael H. Herring, CFA, CMT, Investment Strategist

    General inquiriesPortfolio, Action and Research Team (416) 359-6600

    production & distributionLaura.Furgiuele@bmonb.com Susan.Steele@bmonb.com

    Portfolio, Action & Research Team

    canadian equities Guided portfolioCaroline Escott, CFA, Canadian Equity Specialist Ann Rait, Canadian Equity SpecialistMark Russell, CFA, Canadian Equity SpecialistVince Francescut, Associate, Canadian Equity Specialist

    U.s. equities Guided portfolioMelissa Cavelti, CFA, Senior U.S. Equity SpecialistStuart Hinshelwood, Associate, U.S. Equity Specialist

    international equities Guided portfolio Ray Busato, CFA, International Equity Specialist

  • Nesbitt BurnsBMO R

    2 U.S. Equities Guided Portfolio March 2008

    We continue to be underweight U.S. financials and we are, in fact, lowering our weighting in the sector this quarter with the removal of Bank of America. While the sector has come under significant pressure and some names seem to offer good value, we believe there are still a lot of uncertainties in the financial sector. This includes the weakening U.S. consumer, concerns about mortgage refinancing and the housing market, structured products and slowing investment banking revenues. We have added Disney to the consumer discretionary sector, as this is ISI Groups number one rated strategist Francois Trahans top-rated sector. The sector has been hurt by poor U.S. consumer sentiment as well as a slowing economy. Many of these stocks are cheap and we think there is limited downside in this sector.

    We have made the following changes to the portfolio this quarter:

    We are removing Bank of America (BAC) from the portfolio. While BAC remains one of the best managed of the U.S. banks, we continue to believe the U.S. financial services sector will not Outperform and that Canadian banks offer better fundamentals than their U.S. peers.

    We are removing Amgen (AMGN) from the portfolio. This was a hard decision for us as Amgen is a diversified drug franchise with significant potential from a new pipeline drug, D-Mab. However, Amgen continues to suffer from negative headlines related to its Epo/Aranesp franchise and we dont see this ending anytime soon. We continue to believe this stock offers great value, but think there is more upside in McKesson (MCK) in the next few months. We are trying to move our healthcare focus away from pharmaceuticals and towards healthcare services which is what McKesson offers. Our other healthcare services investment remains CVS/Caremark which offers Pharmacy Benefit Manager services.

    Lastly, we are removing Altria (MO) from the portfolio. We still like this stock and would even be buying at current levels. The company will be undergoing a restructuring and, as of March 28, 2008, spin off its Philip Morris International business. We would hold shares into the restructuring. However, to avoid the complications of the spin-off for the portfolio and to make room for different investments, we are removing the stock.

    We are adding Walt Disney (DIS) to the portfolio. This is a well-run blue chip company trading at one of its cheapest valuations in several years.

    We are adding McKesson (MCK) to the portfolio to increase our exposure to the health care sector to Market Weight. McKesson provides drug/medical distribution services as well as health care IT services. The outlook for these businesses is very positive, and McKesson is currently trading at a very attractive level given its strong fundamental outlook.

    We are adding United Parcel Service Inc. (UPS). Ed Wolfe, Bear Stearns number one ranked Transportation analyst, recently upgraded this stock to Outperform. He notes that the transportation/logistics sector tends to lead the market higher coming out of an economic slowdown. UPSs fundamentals have improved, as has its labour situation. Current valuations provide us with an attractive entry point for this high-quality, blue-chip defensive investment.

    This report is priced as of February 29, 2008.

  • Nesbitt BurnsBMO R

    U.S. Equities Guided Portfolio March 2008 3

    Ameriprise Financial (AMP)

    Current Price: $50.64 Sector: Financial

    company overview

    Ameriprise Financial completed its spin-off from American Express on September 30, 2005, and began trading on the NYSE on October 3, 2005. Despite this, the company is no newcomer to financial services; it ranks among the largest providers of financial planning and brokerage services in the U.S. AMP offers a broad assortment of products, including mutual funds, annuities and life insurance products, and has a network of over 12,500 financial advisers, which ranks as the fifth-largest sales force in the U.S.

    investment thesis

    Amer