Chris Blumas' Top Picks
FOCUS: North American large caps
While there is no shortage of worries facing investors these days, the biggest risk moving forward is tapering. Last month the U.S. Federal Reserve gave the market notice that it is likely to begin aggressively tapering its bond purchases later this year. Additionally, the U.S. Treasury Department announced plans to build up the cash in the Treasury General Account (TGA) heading into year end. These potential changes suggest that the wave of liquidity that has driven assets prices higher over the last eighteen months could start to subside. While the intensity of these changes can be adjusted, the risk of a market correction is probably greater than the majority of investors realize.
Inflation is rising everywhere and could stick around much longer than expected. Pent-up demand and supply constraints brought on by the global pandemic have caused commodity prices and shipping costs to soar. With exceptionally low nominal interest rates and negative real returns, investors holding cash and fixed income securities risk a decline in purchasing power over time.
While putting investment dollars to work in this uncertain environment can be challenging, equities still look like the most attractive outlet for investors. There are pockets of value in today’s markets and the sectors that look to offer attractive value include energy infrastructure, financials, REITs, and consumer staples. Going forward, I think that investors should remain well diversified and defensively positioned and avoid the temptation to speculate and chase returns on securities with extreme overvaluation.
If market uncertainty or volatility is causing you to question your investment strategy, it may be time for a second opinion. By reviewing your asset, account, and individual security allocations you can better understand the level of risk and the tax efficiency of your portfolio.
Enghouse Systems (ENGH TSX)
Last bought at $54.93 on Oct. 10/21
Enghouse is an enterprise software company with a global presence. Last year, more than 90 per cent of revenues were generated outside of Canada. The company acquires and manages software for several vertical markets and has a diversified product suite. Management has done a tremendous job compounding capital through acquisitions and looks for a cash flow payback within 5-6 years while minimizing shareholder dilution. The company reported Q3 results last month that underwhelmed the market as demand for its video conferencing product normalized. Nevertheless, cash flows remained very strong and were only down 4 per cent on a year-to-date basis. Additionally, the company has a strong cash position (~$190M or ~$3.40 per share) and a solid acquisition pipeline. The shares are currently down around 10 per cent year-to-date and have a free cash flow yield (TTM) of 4 per cent.
Raytheon Technologies (RTX NYSE)
Last bought at $83.64 on Sept. 17/21
Raytheon is an aerospace and defense company with a global presence. The company was created last year with the combination of United Technologies aerospace business and legacy Raytheon. The combined company has a unique business model because of the relative balance between the aerospace and defense businesses. Overall, this gives Raytheon greater cash flow stability and the ability to operate in a more counter cyclical manner. The company also has a strong management team and is very shareholder friendly. Going forward, the big driver of future profits is the structural cost reductions associated with the merger and the continued recovery within the commercial aerospace sector. The shares currently trade at 18x forward earnings and have a dividend yield of 2.2 per cent.
Great-West Lifeco (GWO TSX)
Last bought at $38.53 on Sept. 2/21
Great-West is a financial services holding company focused on providing insurance, investment management, and retirement services. The company has a mature market focus and operates in Canada, the U.S., and Europe. Great-West generates most of its profits in Canada and Europe and has made a big acquisition push in the U.S. retirement services market over the last few years. Going forward, I think management will do an excellent job generating accretive earnings per share growth and generating strong returns for shareholders. The shares currently trade at 10.5x forward earnings and have a dividend yield of 4.5 per cent.
PAST PICKS: February 26, 2020
CVS Health (CVS NYSE)
- Then: $62.65
- Now: $84.32
- Return: 35%
- Total Return: 39%
Bank of Nova Scotia (BNS TSX)
- Then: $72.50
- Now: $78.37
- Return: 8%
- Total Return: 17%
CGI (GIB/A TSX)
- Then: $96.95
- Now: $109.32
- Return: 13%
- Total Return: 13%
Total Return Average: 23%