-
Recap of 2015
In 2015 we encountered: increased volatility driven by the Greek
debt fiasco in
the late Spring, concerns over China’s slowing growth in late
summer, and speculation
over the timing of a rate hike from the Federal Reserve.
With 2015 coming to a close, we have positioned our portfolio
for the upcoming
year. Following our top-down investment approach, we have
re-analyzed the
macroeconomic environment, and strategically positioned our
holdings in each sector
accordingly.
Macroeconomic View
Moderately Bullish on the U.S. Economy
Neutral on the Canadian Economy
Growth opportunities in both countries stemming from areas
related to consumer
spending, with more attractive opportunities in the U.S.
Expect the Canadian Dollar to continue to depreciate against the
U.S. Dollar
Kyle Stolys
Portfolio Manager
B.Comm Finance, 2016
[email protected]
Kevin Pei
Quantitative Analyst
B.Comm Finance & IS, 2016
[email protected]
Max Yam
Consumers & Tech Manager
B.Comm Finance, 2017
[email protected]
2016 Economic Outlook
November 28, 2015
Chris McClure Koutsikaloudis
Energy & Materials Manager
B.Comm Finance, 2017
[email protected]
Macro
econ
om
ic Research
Spencer Clarke
Financials & Health Care Manager
B.Comm, Minor in Math, 2017
[email protected]
Gwynne Cunningham
Industrials & Utilities Manager
B.Comm, 2015
[email protected]
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Macroeconomic View
We are moderately bullish on the U.S. economy, and neutral on
the Canadian economy,
seeing growth opportunities in areas exposed to consumer
spending. We expect the U.S. economy to
grow at a faster rate than Canada’s over the short to
intermediate term. The global arena is mixed; as
a result of slow or negative economic growth, many countries
have cut interest rates in an effort to
boost economic activity. China – the big story of 2015 – is
experiencing slower growth rates, due in
part to the country’s unprecedented industrial build out that
caused a commodity boom during the
2000’s. We believe that while areas related to industrials in
China will continue to struggle, the
Chinese middle class will grow stronger and China will continue
its shift towards being a consumer-
based economy. In South America we believe growth will be
challenged over the next 1-2 years as
several of these countries are heavily dependent on commodities.
This exposure combined with the
prospect of Federal Reserve rate hikes which will result in
greater interest payments on USD-
denominated debt, leaves us concerned about the economic
prospects of countries in these regions.
In Europe, many regions continue to struggle to grow; the ECB
appears prepared to undergo a second
round of Quantitative Easing, which could provide a boost to
Eurozone economies. All in all, the U.S.
economy is in our opinion the most attractive market to invest
in currently.
Within the U.S. economy there are several discrepancies across
growth and performance.
Industries that are exposed to commodities have performed poorly
over the last 1-2 years and the
outlook is bleak. Some of our holdings such as: Monsanto, Union
Pacific, Jacobs Engineering, and our
three energy holdings have all had horrific performance in 2015
due entirely to their commodity
exposure. However, sectors unrelated to commodities such as
consumer goods, technology, and
financials have performed well in 2015. On an aggregate basis we
expect such trends to continue into
2016.
The unemployment rate in the U.S. (figure 1) has fallen to a
level many economists believe is
the natural unemployment rate (US. Congressional Budget Office,
2015). This is forcing the labour
market to grow tighter which should lead to wage growth in the
future - boding well for consumer
spending. U.S. consumer confidence (figure 2) (while volatile in
recent months) has been on a multi-
year rise. It currently sits at a significant margin above where
it lay 1 and 2 years ago, as well as above
the long-term average. U.S. retail sales (figure 3) haven’t been
particularly strong, but certain pockets
such as automotive (figure 4), clothing, and furniture have
grown at 5%+ YoY in 2015. With all of the
uncertainty in today’s market we see the greatest stability and
growth in areas related to the U.S.
consumer. Therefore we expect companies that service the U.S.
consumer to experience the strongest
growth over the near and intermediate term.
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Sector Views
We have developed views on each sector relative to the weighting
that is in our benchmark.
Our benchmark consists of 65% S&P 500, and 35% S&P TSX
(Appendix A1). In each view we have a 1-2
year time horizon, and we re-evaluate these views every 6
months. The qualitative views are
converted into actionable metrics through the use of our
Tactical Sector Allocation model (TSA). The
TSA is a quantitative framework that takes into account,
associated market risks, as well as posterior
returns, to output a set of optimal weightings. Figure 5 below
illustrates the benchmark’s current
market capitalized weighting (blue dots) along with our
strategic weighting (orange dots) for each
sector. As shown, the suggested weights are indeed aligned with
our qualitative beliefs on how the
sector will perform in the coming years; we are currently making
changes to shift our portfolio towards
this allocation. For a breakdown of our individual holdings and
the main investment thesis of each, see
Appendix B.
Figure 1: U.S. Unemployment Rate
Source: Federal Reserve Bank of St. Louis
Sep-15: 5.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
% U
nem
plo
yed
Figure 2: University of Michigan Consumer
Sentiment Index
Source: Federal Reserve Bank of St. Louis
Sep-15: 87.2
Average:85.3
50
60
70
80
90
100
110
120
Figure 3: Retail Sales (Excl: Food Services) YoY
Growth
Source: Federal Reserve Bank of St. Louis
Sep-15:
1.7
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
YoY
Ch
an
ge (
%)
Figure 4: Light Weight Vehicle Sales: Autos &
Light Trucks
Source: Federal Reserve Bank of St. Louis
Sep-15:18.1
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
Mil
lio
ns
of S
ale
s (M
on
thly
)
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Figure 5: Summary of Sector Positioning
Basic Materials - Underweight
SSIF Weighting: 3.0% | Benchmark Weighting: 5.2%
Commodity markets across the board have performed negatively
over the past two years.
During the past decade strong growth from China urged commodity
producers to invest significantly in
additional capacity. In 2011, China’s industrial growth began to
slow, but capacity continued to come
online. In our opinion this has caused a commodity supercycle
that will continue to worsen before it
gets better. As a result we are underweight the basic materials
sector.
Consumer Discretionary – Overweight
SSIF Weighting: 13.9% | Benchmark Weighting: 11.1%
As the United States continues its recovery, we expect the U.S.
consumer to become more
confident, resulting in increased consumer spending. And we see
areas exposed to the U.S. consumer
as attractive for investment. We believe that our current
holdings will continue to benefit from the
recovery and deliver strong returns. As a result we are
overweight the consumer discretionary sector,
with a tilt towards companies with U.S. exposure over
Canadian.
Consumer Staples – Overweight
SSIF Weighting: 10.1% | Benchmark Weighting: 7.8%
The U.S. economy has experienced a relatively slow economic
recovery. Normally, during a
recovery, one would expect the consumer staples sector to
underperform the broader market. While
we are bullish on the U.S., we expect to see moderate growth
similar to the last three years. It is our
view that the U.S. consumer will continue to grow stronger,
benefiting both the consumer
discretionary and consumer staples sectors - albeit the former
to a greater degree. We believe that
Sector PositioningBenchmark
Weighting
SSIF
WeightingSummary
Basic Materials Underweight 5.2% 3.0%
Consumer Discretionary Overweight 11.1% 13.9%
Consumer Staples Overweight 7.8% 10.1%
Energy Overweight 11.5% 14.1%
Financials Underweight 23.8% 16.7%
Health Care Overweight 10.4% 12.8%
Industrials Equalweight 9.5% 8.8%
Technology Overweight 14.5% 17.6%
Telecommunications Underweight 3.5% 0.0%
Utilities Equalweight 2.7% 3.0%
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being overweight in both sectors is an effective hedge. If we
are wrong in our view and the U.S.
economy enters a recession, the staples sector will likely
outperform the broader market as staples are
a basic necessity. The consumer staples sector is a very
attractive area of investment in our view,
meshing well with our investment philosophy. As a result, we are
overweight the consumer staples
sector.
Energy – Overweight
SSIF Weighting: 14.1% | Benchmark Weighting: 11.5%
Oil prices fell tremendously during the latter half of 2014, and
continued to drop in early
2015. In our last update in April we believed that while
opportunities had begun to arise in the oil
market, things could get worse before they got better, and we
would look to shift our portfolio to an
overweight energy weighting by year-end 2015. Given the events
since April (expanded on below), we
continue to hold this view. Oil production in the U.S. began to
decline in May, an indicator of a
bottoming process (Appendix A2), and although OPEC has aimed to
defend its market share by
bleeding out higher cost competitors from North America, this
strategy can only be used as long as the
Governments of its member nations have the reserves to sustain
their public budgets. As the majority
of OPEC member nations depend primarily on oil reserves to fund
their national budgets, we are
already seeing these countries burn through reserves at an
increasing pace. We believe this is
unsustainable and can already see evidence of weakness from
Saudi Arabia and Venezuela’s
governments (see Appendix A3 and A4). Given our long-term
investment horizon we feel that WTI
Crude prices at $45 have presented attractive opportunities for
investment. As a result we are
overweight the energy sector.
Financials – Underweight
SSIF Weighting: 16.7% | Benchmark Weighting: 23.8%
The Financials sector is our benchmark’s largest weighting and
in our opinion is too exposed
to financials for a portfolio with our mandate. As a result we
are underweight the financials sector.
However, the question becomes: how underweight are we? Banks,
which are the majority of the
financial sector have seen their net interest margins (the
primary driver of profits) squeezed in today’s
low rate environment. While the consensus is that the U.S.
Federal Reserve will begin raising rates in
the near term, it appears this will occur at a very slow pace,
and banks will continue to operate at low
net interest margins over the foreseeable future. Outside of
banking, we find the insurance business as
attractive with an ability to generate strong returns over the
long term. Overall, we feel moderate
about the financials sector and have targeted a portfolio
weighting between 14-19%.
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Health Care – Overweight
SSIF Weighting: 12.8% | Benchmark Weighting: 10.4%
The Health Care sector performed very well during the first half
of 2015 but has since turned
negative due to investor worry over the potential for an
incoming U.S. president to implement price
caps on drugs, hurting potential pharmaceutical profits. While
this is a cause for concern, we feel that
the market has over-reacted to the event and has sold off
anything related to health care as a result.
The undeniable fact within the health care sector is that the
Canadian and U.S. populations are aging
and will need additional health support in the future. The U.S.
currently outspends every other country
in health care as a percentage of GDP (Deloitte, 2015). This
percentage is forecasted to increase to
17.9% by 2018 (The World Bank, 2015) (see Appendix A5). This is
due, in part, to the aging U.S.
population (Appendix A6) and recent implementation of the
Affordable Care Act (ACA); more citizens
can afford basic care. The ACA aims to cover 95% of American
citizens by 2019, a 10% increase from
current coverage figures (Deloitte, 2015). The discrepancy in
U.S. health care expenditure compared to
other nations is attributed to their lack of a national health
care budget: as of 2015, they are the only
country without one (Deloitte, 2015). This provides a tailwind
for the health care sector that we are
confident in and want to remain exposed to. As a result we are
overweight the health care sector.
Industrials – Equalweight
SSIF Weighting: 8.8% | Benchmark Weighting: 9.5%
The Industrials sector is a very diverse sector, including
businesses related to airplanes,
consulting, railroads, engineering, etc. Given its diverse
nature we see the industrials sector almost as
a proxy for the U.S. economy, which we feel confident in. Within
the industrials sector we feel strongly
about certain areas such as infrastructure, and transportation
but do not have a view on many of the
other segments, and as a result are equalweight the industrials
sector.
Information Technology – Overweight
SSIF Weighting: 17.6% | Benchmark Weighting: 14.5%
We feel confident in our current holdings in the technology
sector and many other areas of
the sector. We do however feel uneasy about the valuations of
certain industries, where we believe
that the market has priced in more aggressive growth than is
likely to come to fruition. In particular,
industries with exposure to the Internet of Things and Big Data,
are segments that we expect to
become more prevalent in the future. We believe they will
experience steady growth over the next
decade, but at a slower rate than the market consensus. We
maintain an overweight position in
technology as we believe there are an ample number of investment
opportunities available in the
sector.
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Telecommunications – Underweight (Zeroweight)
SSIF Weighting: 0.0% | Benchmark Weighting: 3.5%
The Telecommunications sector is unattractive in our view. While
the demand for internet
service, and wireless communication is expected to grow, it is
our view that to meet this demand
telecom companies will be forced to undergo heavy investment
into new infrastructure. This will likely
lead to a period of consolidation which will cause the sector to
behave as more of a utility.
Additionally, at this current time, the sector is very
competitive, with most firms competing solely on
price, which in our view will lead to poor returns on the
largescale future investment. As a result, we
do not see opportunities within the telecommunications sector
and have a zero-percent weighting.
Utilities – Equalweight
SSIF Weighting: 3.0% | Benchmark Weighting: 2.7%
The utilities sector is marked by low but stable returns. We
currently view other sectors as
more attractive areas of investment but are confident in our
single utility holding – Public Service
Enterprise Group.
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References
Bloomberg Terminal. (2015).
Deloitte. (2015). 2015 health care providers outlook.
EIA. (2015, September 30). U.S. FIeld Production of Crude Oil.
Retrieved October 28, 2015, from
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M
Federal Reserve Bank of St. Louis. (2015). FRED Economic Data.
Retrieved from
https://research.stlouisfed.org/fred2/
McGraw Hill Financial. (2015, September 30). S&P 500 Index.
Retrieved October 28, 2015, from
http://ca.spindices.com/indices/equity/sp-500
McGraw Hill Financial. (2015, September 30). S&P TSX
Composite Index. Retrieved October 28, 2015,
from
http://ca.spindices.com/indices/equity/sp-tsx-composite-index
The World Bank. (2015). World DataBank.
US. Congressional Budget Office. (2015, October 28). Natural
Rate of Unemployment (Long-Term)
[NROU]. Retrieved from FRED, Federal Reserve Bank of St.
Louis:
https://research.stlouisfed.org/fred2/series/NROU
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Source: EIA
Appendix A
Figure A1: Benchmark Weighting Breakdown, as at October 2015
Figure A2: U.S. Monthly Crude Oil Production
Basic Materials 9.5% 2.9% 5.2%
Consumer Discretionary 7.3% 13.2% 11.1%
Consumer Staples 4.3% 9.7% 7.8%
Energy 19.6% 7.1% 11.5%
Financials 37.8% 16.2% 23.8%
Health Care 2.6% 14.6% 10.4%
Industrials 8.3% 10.2% 9.5%
Information Technology 2.8% 20.8% 14.5%
Telecommunications 5.6% 2.4% 3.5%
Utilities 2.2% 2.9% 2.7%
Benchmark Weightings as at
Oct-15
S&P/TSX
(35%)
S&P 500
(65%)
Benchmark
Weighting
Apr-15 (Peak) 9,601
Jul -15:
9,358
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
U.S
. M
on
thly
Cru
de
Oil
Pro
du
cto
n
(00
0's
/da
y)
Source: McGraw Hill Financial
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2016 ECONOMIC OUTLOOK
Sep-15:654,541
400,000
450,000
500,000
550,000
600,000
650,000
700,000
750,000
800,000
Mil
lio
ns
of U
SD
Figure A3: Saudia Arabia foreign currency reserves
Source: Bloomberg
Figure A4: Venezuela foreign currency reserves
Source: Bloomberg
Nov-15:14,655
10,000
15,000
20,000
25,000
30,000
35,000
Mil
lio
ns
of U
SD
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2016 ECONOMIC OUTLOOK
2014: 14.4%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
% o
f P
op
ula
tio
n
Figure A6: U.S. Population ages 65 and over (% of total)
Source: World Bank
2013: 17.1% | $9,146
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
$0
$2,000
$4,000
$6,000
$8,000
$10,000
% o
f G
DP
Per
ca
pit
a
Health expend. (per capita) L Health expend. (% of GDP) R
Figure A5: U.S. Health expenditure per capita and % of GDP
Source: World Bank
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Company Ticker Exchange Sector Description Thesis
Monsanto MON US Basic
Materials
Monsanto Company provides
agricultural products for farmers. The
Company's business segments are seeds
and genomics. Monsanto produces a
wide range of seeds and develops
biotechnology traits that assist farmers
in controlling insects and weeds as well
as provides other seed companies with
genetic material and biotechnology traits
for their seed brands.
• Continued growth in global demand for
food products will continue to be driven by an
increasing population and larger food portion
sizes
• MON’s product line allows farmers to
harvest crops more efficiently and yield greater
volume per acre.
• MON has been effective in increasing its EPS
on a consistent and stable basis. Management
has targeted a diluted EPS of $5.75 - $6 and
this goal will likely be accomplished
Gentex GNTX US Consumer
Discretionary
Gentex Corporation designs,
manufactures, and markets products
that use electro-optic technology. The
Company's product lines include
automatic-dimming rearview mirrors and
fire protection products. Gentex's Night
Vision Safety Mirror automatically
darkens to the degree required to
eliminate rearview headlight glare. The
Company sells its products around the
world.
• Gentex is set to benefit from an increasing
global automobile production, a rising
demand for safety features, and a stronger US
vehicle demand.
• Gentex dominates the electrochromic mirror
industry with 90% marketshare. This segment
accounts for 20% of the automotive mirrors in
auto's
• Strong ROIC (15% +) and 29% operating
margins, which are very high compared to the
average in the auto industry
Home Depot HD US Consumer
Discretionary
The Home Depot, Inc. is a home
improvement retailer that sells building
materials and home improvement
products. The Company sells a wide
assortment of building materials, home
improvement and lawn and garden
products and provide a number of
services. Home Depot operates
throughout the U.S. (including Puerto
Rico, the Virgin Islands and Guam),
Canada, China, and Mexico.
• Home Depot is the leading home
improvement retailer in North America.
• Home Depot has generated an ROIC of over
15% for the past 5 years and has had an
increasing EVA spread since 2010.
• Home Depot has been expanding its online
presence over the past few years. Currently 5%
of sales are online, and these online sales are
expected to grow at 25%.
• The housing market continues to recover,
leading to a greater number of home
renovations. As such, Home Depot is expected
to grow at mid-single digits.
Michael Kors KORS US Consumer
Discretionary
Michael Kors Holdings Limited is a global
luxury lifestyle brand. The Company
operates in retail, wholesale, and
licensing with a strategically controlled
global distribution network focused on
company-operated retail stores, leading
department stores, specialty stores and
select licensing partners.
• The luxury goods industry is favourable,
competing on brand versus price delivering
consistently high operating margins and ROIC
• Management has demonstrated that they
have a long-term focus and have successfully
operated with the same corporate strategy in
place since 2006
• Concerns over brand value loss, and the
coinciding share price drop is overdone
resulting in a buying opportunity at fwd
EV/EBITDA of 6x vs. peer average of 10x.
Appendix B – Current Holdings: Description & Thesis
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Company Ticker Exchange Sector Description Thesis
CVS Health CVS US Consumer
Staples
CVS Health Corporation is an integrated
pharmacy health care provider. The
Company's offerings include pharmacy
benefit management services; mail order,
retail and specialty pharmacy; disease
management programs; and retail clinics.
The company operates drugstores
throughout the U.S., the District of
Columbia, and Puerto Rico.
• Affordable Care Act to drive prescription
volumes. It is anticipated that 30 million
people will receive increased coverage by
2018. We expect that this will provide strong
single digit growth for the company moving
forward.
• Low correlations with other staples in the
portfolio and a business segment we did not
have exposure to
• ROE in excess of 10% for the past 10 years
The North West
Company
NWC CN Consumer
Staples
North West Company, Inc. retails food,
family apparel, housewares, appliances,
outdoor products, and offers services
such as quick-service prepared food,
special ordering, money transfers and
check cashing. The Company operates
in underserved rural communities in
Canada, Alaska, the South Pacific, and
the Caribbean.
• Due to the niche nature of the business
NWC is able to sustain operating margins
higher than all other Canadian grocers
• NWC operates grocery and discount stores
in regions in which competition is sparse.
• Stable and secure cash flows result in a very
low beta
• 80% of cash flows are paid as dividends at a
yield of 4.2%
Kinder Morgan KMI US Energy Kinder Morgan Inc. is a pipeline
transportation and energy storage
company. The Company owns and
operates pipelines that transport natural
gas, gasoline, crude oil, carbon dioxide
and other products, and terminals that
store petroleum products and chemicals
and handle bulk materials like coal and
petroleum coke.
• Largest energy infrastructure company in
North-America, with a stranglehold on the
midstream industry
• Fee-based revenue streams (94% of margins)
that offer a stable counterpoint to our other,
more volatile energy positions
• New corporate structure significantly
reduces cost of capital
Schlumberger SLB US Energy Schlumberger Limited is an oil
services
company. The Company, through its
subsidiaries, provides a wide range of
services, including technology, project
management and information solutions
to the international petroleum industry
as well as advanced acquisition and data
processing surveys.
• SLB is strongly positioned, with the largest
market share (30%+), greatest level of global
exposure and leadership in offshore drilling
and technologies.
• SLB has 15%+ operating margins, and
generates ROIC >10%
• Recent acquisition of Cameron International
($18B acquisition) will increase its dominance
in offshore and deep water drilling.
• Large cash balances and low debt gives the
company some buffer in the low oil price
environment.
Total S.A. TOT US Energy Total SA explores for, produces,
refines,
transports, and markets oil and natural
gas. The Company also operates a
chemical division which produces
polypropylene, polyethylene,
polystyrene, rubber, paint, ink,
adhesives, and resins. Total operates
gasoline filling stations in Europe, the
United States, and Africa.
• An improving product mix, as some
European assets are sold and upstream
projects come online in the next several years,
with a focus on LNG that will play into the
Asian gas story.
• Total is in the midst of an exploitation
phase, having invested significantly over the
past several years. This positions them well to
cut capex in the current price environment,
but still have production ramp up at a very low
marginal cost, allowing it to grow faster than
its peers, and remain more resilient to negative
commodity prices.
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Company Ticker Exchange Sector Description Thesis
Bank of Nova
Scotia
BNS CN Financials Bank of Nova Scotia provides retail,
commercial, international, corporate,
investment and private banking services
and products.
• Canadian banks have excellent ROE, BNS is
~15%
• Diversified asset holdings and business
practices – BNS possesses one of the most
diversified securities lending and repo equity
portfolios in the world. Prime brokerage and
securities lending are able to secure high
margins because of their diverse holdings of
highly illiquid securities.
• Currently trading at historically low P/E ratio
Great-West Life
Co.
GWO CN Financials Great-West Lifeco Inc. is a financial
services holding company with interests
in the life insurance, health insurance,
investment and retirement savings, and
reinsurance businesses. The Company
serves the financial security needs of
people in Canada and the United States.
• LT focused management team, very
conservative
• Leading life insurer in Canada and leading
life assurance provider in Europe with 35%
market share
• Industry leading ROE (15%+)
Wells Fargo WFC US Financials Wells Fargo & Company is a
diversified
financial services company providing
banking, insurance, investments,
mortgage, leasing, credit cards, and
consumer finance. The Company
operates through physical stores, the
Internet and other distribution channels
across North America and elsewhere
internationally.
• Diversified banking operations, higher net
interest margins and ROE in comparison to
competitors.
• Largest share of consumer banking in the
United States.
• Tier-1 levels well above the legal minimum
for American banks.
Lannett Co. LCI US Health Care Lannett Company, Inc.
manufactures
and distributes pharmaceutical products
under its own trade name and under
generic names. The Company also
distributes competitive pharmaceutical
products manufactured by other
companies. The principal products
include antifungals, antacids,
dermatological preparations, and
analgesic sedatives.
• Highly cost effective and efficient. Vertical
integration allows the firm to maintain cost
competitiveness and significantly increase
profit margins in comparison to the
competition.
• Focus on pain medication, and Thyroid
deficiency (mental health treatment)
• High barriers to entry due to patents, and
their license to import raw poppy straw (1/7
licenses in US)
Jacobs
Engineering
JEC US Industrials Jacobs Engineering Group, Inc. provides
a broad range of technical, professional,
and construction services to a large
number of industrial, commercial, and
governmental clients around the world.
The Company's services include project
services, process, scientific, and systems
consulting, construction services, and
operations and maintenance services.
• Jacobs is positioned to capitalize on both
U.S. infrastructure and chemical capital
investment trends
• Historical focus on acquisitions will
continue to expand operations into Asia
Pacific growth regions for upcoming biotech
and pharmaceutical investment
• 90%+ revenues are derived from repeat
business
• 83% of total revenues are provided by cost
reimbursable contracts speaking to the
reputation Jacobs' has built as a quality
provider of services
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SPROTT STUDENT INVESTMENT FUND
14
2016 ECONOMIC OUTLOOK
Company Ticker Exchange Sector Description Thesis
Union Pacific UNP US Industrials Union Pacific Corporation is a
rail
transportation company. The
Company's railroad hauls a variety of
goods, including agricultural,
automotive, and chemical products.
Union Pacific offersslong-haul routes
from all major West Coast and Gulf Coast
ports to eastern gateways as well as
connects with Canada's rail systems and
serves the major gateways to Mexico.
• Long term US imports are expected to
increase as the real exchange rate and
purchasing power of US consumers improves,
causing a rise in intermodal traffic/carload
shipments
• Agricultural shipments are forecasted to
increase alongside the US population growth
rates
• UNP is the only Class 1 railway with six
gateways to Mexico, which allows them to
capitalize on the Mexican auto production
boom
• Strong ROE in excess of 15% over the long
term
Apple AAPL US Technology Apple Inc. designs, manufactures,
and
markets personal computers and related
personal computing and mobile
communication devices along with a
variety of related software, services,
peripherals, and networking solutions.
The Company sells its products
worldwide through its online stores, its
retail stores, its direct sales force, third-
party wholesalers, and resellers.
• A Unique ecosystem which facilitates
growth of future products
• Short product cycles, products are updated
often and are quickly and widely adopted by
the user base.
• Proven ability to continuously innovate and
consistently high ROIC of over 30% over the
past five years.
Taiwan
Semiconductor
TSM US Technology Taiwan Semiconductor Manufacturing
Company Ltd. manufactures integrated
circuits based on its proprietary designs.
The Company offers a comprehensive
set of integrated circuit fabrication
processes to manufacture CMOS logic,
mixed-mode, volatile and non-volatile
memory and BiCMOS chips. Taiwan
Semiconductor is an affiliate of Philips
Electronics N.V.
• The semiconductor industry has extremely
high barriers to entry.
• With a dominant market position
representing 71% of foundry services, TSM has
few significant competitors.
• TSM is well diversified and produces a wide
range of semiconductor products.
• TSM has had ROIC in excess of 20% since
2006 and has continued to grow and expand
their business.
Public Service
Enterprise
Group
PEG US Utilities Public Service Enterprise Group
Incorporated is a public utility holding
company. The Company, through its
subsidiaries, generates, transmits, and
distributes electricity and produces
natural gas in the Northeastern and Mid
Atlantic United States.
• Forecasted higher electricity prices will
enable top line growth
• Coal retirements are expected to benefit
existing power generators given increased
demand per generator
• ROE and profit margins in excess of 10%
long term
• Current dividend yield of 3.9%
SPDR
Pharmaceutical
ETF
XPH US ETF SPDR Pharmaceuticals ETF is an
exchange-traded fund incorporated in
the USA. The Fund's objective is to
replicate as closely as possible the
performance of the S&P
• Held in order to maintain exposure to the
health care industry. Assets will shift out of the
ETF as research in the sector progresses.
Current research is into Johnson & Johnson,
and Amgen