Jul 8, 2020

Chris Blumas' Top Picks: July 8, 2020

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Chris Blumas' Top Picks

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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 down around 8 per cent and have rebounded off the mid-March lows as central banks and governments around the world have stepped in to support their economies and preserve their productive capacity. Right now, there is tremendous uncertainty surrounding the containment of COVID-19 and its long-term impact on the global economy. On the positive side, human behaviours and corporate strategies have evolved and collaboration among companies playing a role in vaccine development has been tremendous. These advances could lead to the resumption of more normal daily activities and spending patterns within the next 12 to 24 months.

Given this uncertain economic backdrop, what should you do? Overall, I think that investors should remain disciplined and avoid the temptation to exit the equity markets and wait on the sidelines. While the shape and the duration of the current recession is unclear, there are lots of pockets of value in today’s market and investors will be rewarded for their discipline over the long term. Looking forward, investors should remain defensive and avoid deeply cyclical companies, instead focusing on financially strong companies with the ability to generate solid free cash flows and access capital markets on reasonable terms.

Top Picks

Chris Blumas' Top Picks

Chris Blumas of GlobeInvest shares his top picks: Dollar Tree, CGI and Algonquin Power.

Dollar Tree (DLTR NASD)

Dollar Tree is a North American-focused dollar store operator operating under the Dollar Tree and Family Dollar banners. The company provides tremendous value and convenience to its customers and has good insulation from online competition. Before the coronavirus, the company was dealing with a few sort-term (shrink, freight, DC costs) and medium-term (import tariffs, banner integration) issues that were impacting profitability. Going forward, management has taken steps to address these issues and over the long-term the company has good defensive properties and the ability to grow earnings in a variety of economic climates. The shares currently trade at 16 times’ forward earnings and have a trailing free cash flow yield of 5 per cent.

CGI Inc (GIB/A TSX)

CGI is an IT outsourcing and consulting company with revenues split almost evenly between its 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 shares currently are trading at 17 times’ forward earnings with a trailing free cash flow yield of 6 per cent.

Algonquin Power & Utilities Corp (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 (PPAs). Additionally, the company has an attractive near-term capital program and a proven acquisition strategy focused on acquiring orphaned assets. The shares currently trade at 17 times’ forward earnings with a dividend yield of almost 5 per cent.