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

MARKET OUTLOOK

It has been a very strong year for North American equity markets, with S&P/TSX Composite Index up around 18 per cent and the S&P 500 up around 25 per cent. If you break down the performance of the U.S. market, you can see that a few large companies are having an outsized influence. Currently, the 10 largest companies in the S&P account for around 22 per cent of its value and the three largest companies account for almost 12 per cent. From a historical perspective, this level of concentration is high and the only period that has exceeded it was the last leg of the late 1990s/early 2000s bull market.

When you look at individual valuations, there is a dichotomy in the market between companies with strong growth prospects and companies that are struggling to grow. As global GDP growth has continued to slow and bond yields to decline, investors have aggressively bid up the prices for companies with above-average growth prospects. It’s become more difficult to find things to buy and of the 60 or so stocks that we follow closely, around 20 per cent are buys.

Looking forward, we think that investors should remain cautious as equity market valuations have become more stretched. There are a number of short-term triggers that could cause an increase in volatility. Rising global trade tensions between the U.S. and China and the disruption caused by a no-deal Brexit are two of our biggest worries. Overall, we think that investors should remain disciplined and wait patiently for market dislocations and/or company-specific volatility to present itself and avoid the temptation to chase returns.

TOP PICKS

CHARTWELL RETIREMENT RESIDENCES (CSH-U:CT)
Purchased at $14.18 on Dec. 16, 2019.

Chartwell owns and operates retirement residences for seniors. The trust’s main business is its private pay retirement operations which account for around 90 per cent of profits. Demographic trends and fiscal constraints on governments should lead to significant private pay demand over the long-term. So far this year, profit growth has been weak as new supply has hit the market and reduced occupancy levels. Going forward, the company has a solid development pipeline that should help drive growth going forward. The trust currently trades at around 14.5 times forward funds from operations and provides investors with a dividend yield in excess of 4 per cent.

PEMBINA PIPELINE (PPL:CT)
Purchased at $47.83 on Dec. 16, 2019.

Pembina is an energy infrastructure company with a unique collection of gathering and processing assets. The company derives around 85 per cent of its profits from fee-based contracts that include take-or-pay and fee-for-service contracts. In addition, Pembina has an investment-grade balance sheet and the ability to fund organic growth initiatives with internally generated cash flows. Going forward, there is tremendous fundamental demand for Pembina’s assets and its strategic footprint provides further opportunities for growth. The stock currently trades at around 10 times forward cash flows and provides investors with a dividend of around 5 per cent.

JOHNSON & JOHNSON (JNJ:UN)
Purchased at $142.05 on Dec. 16, 2019.

Johnson & Johnson is a diversified health care company. The company’s largest and most profitable segment is its pharmaceuticals business, which has multiple therapeutic areas. Overall, this business accounts for around 50 per cent of revenues. The company’s other businesses include medical devices and consumer products, which account for 30 and 20 per cent of revenues respectivelly. It has received a lot of negative press lately and the main overhang on the stock is litigation risk. Going forward, I think these risks are manageable and that the long-term demand for the company’s products remains strong. The stock currently trades at around 16 times earnings and has a trailing free cash flow yield of almost 5 per cent.

PAST PICKS: SEP. 17, 2019

H&R REIT (HR-U:CT)

• Then: $22.57
• Now: $20.82
• Return: -8%
• Total return: -6%

NUTRIEN (NTR:CT)

• Then: $68.51
• Now: $63.76
• Return: -7%
• Total return: -6%

CVS HEALTH CORP (CVS:UN)

• Then: $63.48
• Now: $74.40
• Return: 17%
• Total return: 18%

Total return average: 2%

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