Full episode: Market Call Tonight for Monday, June 24, 2019
Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management
Focus: North American large caps
We may be in an extended period of ultra-low interest rates. Inflation is one of the biggest determinants of future interest rate levels and, since 2012, inflation in the U.S. and Canada has held steadily below 2 per cent. This phenomenon is not limited to North America and low inflation rates have been observed for most OECD countries. On a simplistic level, central banks use interest rates as a tool to cool inflation. If low inflation continues, there will be a limited need to raise rates.
Low interest rates are a benefit to risk-seekers. They allow individuals and businesses to borrow more money than they would otherwise be able to afford. This increased borrowing capacity can be used to buy houses, make investments, acquire other companies and increase capital spending. Unfortunately, low interest rates punish retirees. Those looking for a comfortable retirement may be forced to accept a lot more risk through the assumption of market volatility to achieve reasonable rates of return.
Low interest rates will have significant implications for our clients and the investments we choose for them. After fees, taxes and inflation, few clients will be satisfied with a portfolio that’s overweight in corporate and government bonds. Currently, reasonable quality corporate bonds that mature 10 years from now offer a yield of 3 per cent. The safest bonds, those issued by the Canadian government, mature in 10 years and offer a paltry yield of just 1.48 per cent. This is most unreasonable.
Many of our retiree clients require at least 4 per cent a year from their portfolio. If the bulk of their portfolios are invested in 3 per cent and 1.48 per cent yielding bonds, those clients will be dipping into principal very quickly and run the risk of running out of money. As a result, we must allocate more of their capital to assets that have a chance to earn returns in excess of their spending requirements.
Our favourite asset class contains shares of good quality companies that have a history of profitability. These companies must grow their dividends or have a skillset of successfully reinvesting their cash flows into growth opportunities. For us, the ideal company is one that not only has a growing dividend and strong reinvestment opportunities, but also delivers organic revenue growth.
TMX GROUP (X.TO)
TMX Group operates the Toronto Stock Exchange. Over the past few years, the company has done an excellent job diversifying its business into data analytics. Today, over half of TMX’s revenue is recurring, with a third coming from outside Canada. The company’s balance sheet is primed for more acquisitions. TMX’s stock is also cheap, trading at a material discount to U.S . exchanges that trade at 20 times earnings.
BECTON DICKINSON (BDX.N)
Becton Dickinson is a provider of medical supplies and diagnostic tools such as needles, catheters, drug tubes and drug-dispensing systems. Becton Dickinson’s portfolio is diverse enough such that no individual product is material to the business. Becton Dickinson’s products are deeply entrenched into the workflows of hospitals. Growth should also come from emerging markets, as Becton Dickinson brings its superior products to places like China.
CONSTELLATION SOFTWARE (CSU.TO)
Constellation Software is a collection of over 200 small software companies that target a specific niche such as public transit, or golf courses. Its companies license hard-to-replace software solutions for both the private and public sector. Constellation has had a terrific track record of acquisitions, compounding its equity at a 30 per cent rate over the last 10 years. Although Constellation is now a lot bigger than it used to be, the company claims that there are over 40,000 acquisition targets in its database with additional opportunities outside of vertical market software. We think that the price is reasonable given Constellation’s track record.
PAST PICKS: SEP. 20, 2018
ACTIVISION BLIZZARD (ATVI.O)
- Then: $80.65
- Now: $47.15
- Return: -42%
- Total return: -41%
- Then: $166.02
- Now: $192.60
- Return: 16%
- Total return: 16%
- Then: $487.14
- Now: $463.40
- Return: -5%
- Total return: -3%
Total return average: -9%