Jim Young, vice-president at Invesco Canada Ltd., says that after pausing for two years to digest previous gains, the U.S. equity market is entering the second leg of its bull market which began in March 2009.
"This second phase of the bull market will be earnings driven," says Young, a veteran U.S. equity manager with an emphasis on growth. Key sectors of the U.S. equity market such as health care and technology are reporting strong earnings growth, he notes. "I am particularly constructive on these two sectors."
The macroeconomic picture is supportive of U.S. equities in general, Young says. There is widespread recognition that "there is a lot of economic stimulus in the world and that interest rates are likely to remain at historic low levels for some time." Also, he says, a number of issues that have plagued U.S. companies, such as the strong U.S. dollar, have worked their way through.
Britain's vote to exit the European Union, says Young, is likely to elicit even more economic stimulus both in Britain and Europe. Furthermore, he says the U.S. Federal Reserve Board "is likely to hold off on any further increase in its policy rate, at least until the end of this year."
On the U.S. economy, Young says that the recovery is intact, job creation is satisfactory, the consumer's health continues to improve and the housing market is solid.
Young points out that there has generally been little enthusiasm for U.S. equities among individual investors over the past two years. "There have been net sales of some US$150 billion over that period, both from mutual funds and ETFs." By contrast, he says, U.S. corporations have been enthusiastic buyers of their own stock.
Of late, says Young, the overall tone of the U.S. equity market has improved. "The S&P 500 Index recently rose to new highs after its two-year performance drought."
Young argues that there is value to be had among growth stocks. In the first half of 2016, "investor emphasis was generally on a number of defensive sectors, where the companies produce little by way of growth, but where the stocks offer high dividend yields." For example, he says, the utilities sector of the S&P 500 Index was the best performer in the first six months of 2016.
At Invesco Canada, Young is responsible for Trimark U.S. Companies and Trimark U.S. Companies Class. This portfolio holds roughly 40 names. He focuses on companies that are innovative and deliver sustainable growth. "The valuation on the stock does have to make sense."
Young has sold holdings in three stocks that are "steady growers and have done well." They are: global manufacturer of branded foods 
General Mills, Inc. (GIS); advertising and corporate communications company Omnicom Group Inc. (OMC) and Becton Dickinson & Co. (BDX), a medical-device company which manufactures syringes and needles. "I deployed the proceeds of these sales in more economically sensitive names where the growth prospects are stronger."
At the end of June, the three biggest sector weights in Trimark U.S. Companies were technology, health care and industrial companies. Technology and health care accounted for almost half of the portfolio.
In technology, Young highlights Splunk Inc. (SPLK), a specialist in cyber security that "dominates its niche and has the first-mover advantage." This data-analytics company provides software that enables businesses to search, monitor and analyze data that is unstructured. "Its products make sense of the data and assist businesses in both cyber security and other areas, such as the maximum utilization of technology assets."
Young sees Splunk as a "hyper-growth" company. "It is growing revenue at 40% per annum and has gross margins of some 80%." Starting from a low base, its free cash flow is "rapidly rising." The stock trades at six times the company's sales, "which is reasonable given the growth it is generating."
Long-standing tech holdings in Trimark U.S. Companies , which Young says have strong growth prospects that have yet to be fully recognized by the market, are Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL), the parent of Google.
| Alphabet Inc. Class A | Microsoft Corp. | Splunk Inc. | |
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| July 18 close | $753.20 | $53.96 | $58.04 |
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| 52-week high/low | $810.35-$593.09 | $56.85-$39.72 | $76.85-$29.85 |
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| Market cap | $517.1 billion | $418.3 billion | $7.7 billion |
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| Total % return 1Y* | 7.7 | 18.7 | -20.3 |
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| Total % return 3Y* | 18.2 | 17.6 | 5.1 |
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| Total % return 5Y* | 20.4 | 17.4 | - |
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| *As of July 18, 2016 Source: Morningstar |
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Microsoft is "successfully" making the transition to a cloud company, Young says. "It is adapting its software to this new mode of processing and storage and there is a large and fast growing market for these services." The other leading player in cloud services is Amazon.com, Inc. (AMZN), he says. Alphabet/Google also offers cloud services, "but it is further behind Microsoft and Amazon in this business."
Young considers that Microsoft's recent US$26.2-billion purchase of LinkedIn Corp. (LNKD) was a good move for Microsoft. LinkedIn, the "highly successful social network for professionals" is also cloud-based. "This provides a new element to Microsoft's cloud strategy."
Alphabet/Google remains the dominant player in the search business. But there is a lot more going on at the company, Young says, in areas such as self-driving cars and home-monitoring technology. "In all, artificial intelligence is a new opportunity for Alphabet/Google." The company is growing its revenue at 17% to 18% a year, he notes.
Facebook Inc. (FB) and Amazon are growing their revenues faster than Alphabet/Google and investors have been favouring these two stocks, he says.
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| Jim Young | |
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In the U.S. health-care sector, the biotechnology companies have been out of favour, "on concerns that a new White House incumbent could initiate adverse rulings re the drug industry." Young says investors have thus opted for the more conservative, high-dividend-paying stocks such as Johnson & Johnson (JNJ), Pfizer Inc. (PFE) and Bristol-Myers Squibb Co. (BMY). All three stocks are held in Trimark U.S. Companies.
Leading biotech giant Celgene Corp. (CELG) is the largest health-care holding in the portfolio. This company has "a broad, deep pipeline of drugs in addition to its well-placed offering of four lead products, three of which address cancer."
Young says that this pipeline represents both Celgene's own products plus those of its 30 partners. The company is growing earnings per share at 20% plus annually and the stock is trading at a multiple of some 16 to 17 times, he says. "Its growth is pretty well locked in for the next decade." The company does not pay a dividend.
In the U.S. financial-services sector, Young says "investors have favoured the non-banks over the chartered banks on concerns that the banks will continue to see margin pressure in the face of the ongoing low interest-rate environment." He considers that major U.S. chartered bank Wells Fargo & Co. (WFC), a top-10 holding and long-standing holding in the portfolio, offers good value. "It should benefit from the second leg of the U.S. bull market." Wells Fargo should continue to grow its assets and fee revenue "given the improving U.S. economy," he adds. "Also, the stock offers a good dividend yield, as do the stocks of other big U.S. banks."
In the U.S. industrial sector, Young considers that General Electric Co. (GE) warrants investor attention. This diversified company has sold down its financial-services interests and is focusing more on its key areas such as power generation, health care, aviation and oil and gas production. "The latter is a smaller component of the company."
GE is a steady earnings grower, Young says, and the stock is inexpensive. "The company has been using some of its surplus capital from the sale of its financial-services interests to buy back stock, indicating its enthusiasm for its prospects."
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