Chris Blumas' Top Picks: Aug. 21, 2020

Chris Blumas, vice-president and portfolio manager at GlobeInvest Capital Management
Focus: North American large caps

MARKET OUTLOOK

The coronavirus has caused unprecedented economic turmoil around the world. Year-to-date, North American equity markets are roughly flat after staging a remarkable rebound off their mid-March lows as central banks and governments internationally stepped in to support their economies. While there is still tremendous uncertainty surrounding the containment of COVID-19 and its long-term economic impact, human behaviours and corporate strategies have started to evolve and adjust to this new reality. In addition, collaboration among government and companies playing a role in vaccine development has been tremendous. Going forward, these advances could lead to the resumption of more normal daily activities and spending patterns within the next few years.

Given this uncertain economic backdrop, what should investors do? I think they should remain disciplined and avoid the temptation to speculate and chase returns. While the shape and the duration of the current recession is unclear, equity market valuations have rebounded sharply as ultra-low interest rates and a wave of liquidity support equity markets. Looking ahead, I think that investors should remain defensive and focus their attention on financially strong companies with the ability to generate free cash flows and access capital markets on reasonable terms.

TOP PICKS

CVS HEALTH (CVS NYSE)

CVS is an integrated healthcare company. It has a unique business model that includes a network of retail pharmacies, a pharmacy benefit manager (PBM) and a health insurer. CVS recently completed the acquisition of Aetna and is very well positioned to meet the evolving needs of its customers. While there is some uncertainty around healthcare reform over the long-term, the company has a strong competitive position and the ability to deliver significant value to its customers. The company reported strong Q2 results, highlighting its resilient business model in the face of significant disruption from COVID-19. The stock is currently trading at around 19 times forward earnings and has a dividend yield of more than 3 per cent.

ALGONQUIN POWER & UTILITIES (AQN TSX)

Algonquin is a diversified utility with a mix of generation, transmission and distribution assets. The company generates the majority (95 per cent) of its revenue in the U.S. and has two main business groups: regulated services and renewable energy. Algonquin generates most of its profits from regulated utility services and has low commodity price exposure through inflation-indexed, long-term power purchasing agreements. Additionally, the company has an attractive near-term capital program and a proven strategy focused on acquiring orphaned assets. The shares currently trade at less than 12 times forward funds from operations and have a dividend yield of almost 4.5 per cent.

CHARTWELL RETIREMENT RESIDENCES (CSH-U TSX)

Chartwell owns and operates retirement residences for seniors. The trust’s main business is its private pay retirement operations, accounting for around 90 per cent of profits. Demographic trends and fiscal constraints on governments should lead to significant long-term private pay demand. So far this year, profit growth has been weak as COVID-19 protocols increased expenses and reduced occupancy levels. Going forward, occupancy should rebound to more normal levels and a solid development pipeline should help enhance growth. The trust currently trades at around 13 times forward funds from operations and provides investors with a dividend yield of almost 6 per cent.

PAST PICKS: SEP. 17, 2019

H&R REIT (HR-U TSX)

• Then: $22.60
• Now: $10.12
• Return: -55%
• Total Return: -52%

NUTRIEN (NTR TSX)

• Then: $68.51
• Now: $49.99
• Return: -27%
• Total Return: -24%

CVS HEALTH (CVS NYSE)

• Then: $63.48
• Now: $63.78
• Return: 1%
• Total Return: 4%

Total Return Average: -24%

Website: http://www.globe-invest.com/