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

MARKET OUTLOOK

With the coronavirus now spreading outside of China, investor fears have sent global equity markets plunging and driven gold to a multi-year high. While the downward revisions to GDP estimates have been minor thus far, commodity markets (specifically, oil, copper and iron ore) could be foreshadowing a more severe economic impact. Central banks likely need more time to see how the data unfolds, but it would not be surprising to see further monetary easing over the short run.

If you step back from the macro headlines and look at individual company 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 have continued to decline, investors have aggressively bid up the prices for companies with above-average growth prospects. Currently, the five largest components of the S&P 500 index are all technology-related stocks and they account for almost 20 per cent of its value. While the recent spike in volatility has created more buying opportunities, it is a more difficult environment to find things to buy and of the 60 or so stocks that we follow closely, around one third are buys.

Looking forward, we think that investors should remain cautious as equity market valuations have become more stretched and there are a number of short-term triggers that could cause an increase in volatility. The economic impact of the coronavirus and renewed trade tensions between the U.S. and China are two of our more pressing concerns. 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 exit the equity markets and wait on the sidelines.

TOP PICKS

CVS HEALTH (CVS NYSE)
Last purchased on Feb. 25 at $64.33.

CVS is an integrated healthcare company. It has a unique business model that includes a network of retail pharmacies, a pharmacy benefit manager 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, the company has a strong competitive position and the ability to deliver significant value to its customers over the long term. The stock is currently trading at around nine times forward earnings and has a free cash flow yield of more than 9 per cent. Over the medium term, CVS provides investors with the potential for earnings growth and multiple expansion.

BANK OF NOVA SCOTIA (BNS TSX)
Last purchased on Feb. 25 at $72.48.

This is one of my top income ideas. Scotiabank is primarily a full-service retail bank with operations in North and South America. The bank’s international footprint is a unique differentiator that should allow it to reinvest profits at a reasonable rate without taking on excessive risk. Currently, it isn’t firing on all cylinders from a profitability perspective, as restructuring and integration initiatives have caused some noise and disappointed investors. The stock is currently trading at 10 times forward earnings and has a dividend yield of 5 per cent.

CGI INC (GIB/A TSX)
Last purchased on Feb. 25 at $96.42.

CGI is an IT outsourcing and consulting company and its revenues are split almost evenly between these service offerings. The company has clients around the world and a strong competitive position in North America and Europe. As companies look to boost their efficiency and transition to a more digital world, CGI’s service offerings and global delivery model lead to enduring client relationships and a high level of recurring revenues. Going forward, CGI is well-positioned to benefit from industry consolidation and has the financial flexibility to create value through acquisitions, organic initiatives and share buybacks. The stock is currently trading at around 19 times forward earnings, has a free cash flow yield of almost 6 per cent and does not pay a dividend.

PAST PICKS: DEC. 16, 2019

CHARTWELL RETIREMENT RESIDENCES (CSH-U TSX)

• Then: $14.09
• Now: $13.53
• Return: -4%
• Total return: -3%

PEMBINA PIPELINE (PPL TSX)

• Then: $47.65
• Now: $50.46
• Return: 6%
• Total return: 7%

JOHNSON & JOHNSON (JNJ NYSE)

• Then: $141.79
• Now: $143.86
• Return: 1%
• Total return: 2%

Total return average: 2%

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