Barry Schwartz's Top Picks: Oct. 31, 2018

Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management
Focus: North American large caps

MARKET OUTLOOK

This month, markets around the globe suffered a nasty selloff. After marching steadily higher throughout the summer and shrugging off worries about rising interest rates and a trade dispute with China, the stock market finally broke. We can try and make up more reasons for the drop, but the truth is that sometimes markets fall after rising so fast. In fact, the S&P 500 index rose 7.7 per cent in the third quarter of this year. In hindsight, a pullback from that fast upward move makes sense. If you have stayed invested with over the past 10 years, you have suffered through 23 drops of 5 per cent or more in the S&P 500 Index. Each drop was painful and tough to live through, but ultimately the S&P 500 recovered all its losses and went higher for each one of those drops.  Experience has taught us that the best course of action during market volatility is to stay invested. Once the volatility calms down, you may want to reassess to see if there are any changes that need to be made to your portfolios.

We believe that we are still in a bull market for stocks. But even in a bull market, no index and no portfolio can go straight up. We believe the conditions are still ripe for your portfolios to improve from here. The North American economy continues to improve, corporate profits are rising, the unemployment rate in the U.S. is at 50-year lows, interest rates are still historically very low, and inflation has so far been tame.

We’re moving ahead with the same cautious approach we have always taken. While we remain fully invested, we will stick to high-quality corporations that have strong balance sheets, that generally have a history of raising dividends and that have a long runway of growth for their products and services. As a result of slowly rising interest rates, we’re keeping bond maturities very short in the hopes that we will be able to earn better returns on fixed income going forward.

TOP PICKS

VISA (V.N)

• NTM P/E: 25x  
• EV/EBITDA: 19x
• Dividend yield: 0.7%

Visa’s business model and strong moat is well understood. but we still like the shares here given the growth of electronic payments. Visa supports $8 trillion of payments a year, but there are still $15 trillion in cash and check payments in the world outside of China, with additional opportunities in peer-to-peer, government-to-customer, and business-to-business. As the world continues toward a digital/cashless society, Visa should be continue to benefit from the growth of digital payment systems such as mobile pay and online shopping. Visa recently raised its dividend 19 per cent.

TMX GROUP (X .TO)

• NTM P/E: 15x
• EV/EBITDA: 12x
• Dividend yield: 2.9%

TMX has transformed its business into a cash compounding machine. It now generates over 30 per cent of its revenue outside of Canada and has a meaningful data analytics business. TMX under CEO Lou Ecclestone has done a good job of improving margins, while positioning TMX’s exchanges such as the TSX and Venture Exchange to attract listings globally. Its balance sheet is ready for more acquisitions. TMX is still trading at a discount to global peers, and is not expensive at 15 times earnings with a recent strong track record of dividend increases. 

BROOKFIELD INFRASTRUCTURE PARTNER (BIP_u.TO)

• NTM P/E: 22x
• EV/EBITDA: 17x
• Dividend yield: 5.4%      

Brookfield Infrastructure is one of the largest owners of infrastructure around the world and has a good track record of managing infrastructure on a value basis, compounding capital by around 15 per cent since inception. Infrastructure is a good place to be from an investment perspective, and offers uncorrelated steady returns. Just last month, the company closed its acquisition of Enercare (which many of our clients owned). It plans to grow Enercare by leveraging its own network of customers, such as sub-metering through Brookfield’s relationship with homebuilders. Brookfield Infrastructure offers a  5.4 per cent distribution yield and we believe its payout to shareholders will continue to rise. 

PAST PICKS: AUG. 29, 2017

ALPHABET (GOOG.O)

• Then: $921.29
• Now: $1,076.77
• Return: 17%
• Total return: 17%

BECTON DICKINSON AND CO (BDX.N)

• Then: $198.90
• Now: $230.50
• Return: 16%
• Total return: 18%

TFI INTERNATIONAL (TFII.TO)

• Then: $29.87
• Now: $42.81
• Return: 43%
• Total return: 47%

Total return average: 27%

TWITTER: @BarrySchwartzBW
WEBSITE: baskinwealth.com