Sep 1, 2016

Barry Schwartz's Top Picks: September 1, 2016

BNN Bloomberg

Barry Schwartz , BNN

Barry Schwartz, Chief Investment Officer and Portfolio Manager, Baskin Wealth Management

FOCUS: North American Large Caps

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MARKET OUTLOOK:

Recent pronouncements from central banks in Canada, the U.S., Britain and Europe have made it clear that interest rates will rise slowly, if at all, over the next few years. In today’s world, risk adverse investors need to expand their horizons. Stock market volatility can be scary, or as was the case in 2008, terrifying. But it is a fact that even with the inevitable market crashes and crises along the way, stocks tend to rise over time. Even the disaster of 2008/09, the worst stock market crash since the 1930s and during which the S&P 500 fell 50 per cent, took only about two or three years to repair. Most market events are much less dramatic and over the long haul, amount to mere blips on an upward sloping line.

Our belief is that in a world of low economic growth and low interest rates, dividends will command a level of attention and importance that they last saw in the early part of the last century. Stocks will be held not only because they may increase in value, but as much or more because they pay dividends which provide a better return than bonds. The best stocks to own will be the ones which are the most reliable dividend payers and dividend growers, and investors will pay a hefty premium to own these kinds of securities. Over the past forty years, dividends have provided a third of the total return for investors in the S&P 500 and about half of the return for investors in the S&P/TSX. We would not be surprised to see dividends account for more than half of all returns on U.S. markets in the coming years.

TMX Group (X.TO)

Forward P/E: 13x, EV/EBITDA: 8x, Dividend Yield: 2.8 per cent

TMX had a very strong Q2 with strong volumes, and will benefit from a rebound in commodity prices and trading volumes. TMX’s cost structure is largely fixed, so there is tremendous operating leverage through the recovery. TMX is going through a transition to a more streamlined and less cyclical business through new product offerings in data analytics and unserved markets. One example is AgriClear, which uses TMX’s capabilities in the cattle market. TMX also hired of a new Chief Digital Officer who has experience in blockchain technology. We think the market will ultimately reward TMX with a valuation close to exchange peers in the U.S.

National Bank (NA.TO)

Forward P/E: 9x, P/B: 1.1x, Dividend Yield: 4.8 per cent

National is the cheapest of the big six banks, this was partially because of National’s energy exposure. National has provisioned more than its peers for the energy book, and with energy on a rebound, this should not be an issue going forward. National has less Ontario and B.C. real estate exposure than peers, as National is mostly focused on Quebec, and with National repurchasing shares, we think it should return to a multiple closer to the other banks.

C.R. Bard (BCR.N)

Forward P/E: 20x, EV/EBITDA: 13x, Dividend Yield: 0.5x

CR Bard is a provider of low-tech medical devices, which are often necessary for the treatment of things such as urology disease. Despite this, Bard’s products are still superior to the competition, and Bard has leading market shares in many of its product categories. Because most of Bard’s products have low price points, Bard has less regulatory risk than some of the other drug makers who may be in trouble for raising prices too aggressively. Bard is now expanding aggressively in emerging markets, particularly in China. Bard’s products are superior to the traditional treatments in these countries, and Bard is working to train the doctors to use their products properly. We also think Bard can continue to make acquisitions in complementary product lines.