Aug 8, 2018

Christine Poole's Top Picks: Aug. 8, 2018

BNN Bloomberg

Christine Poole , BNN Bloomberg

Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps

_______________________________________________________________

MARKET OUTLOOK

While there’s a lot of rhetoric and noise in the news, our focus is on the underlying fundamentals: the global economy is growing and corporate profits are rising. Corporate stock repurchases and dividend increases as well are tailwinds for stocks.

The longevity of the current U.S. business cycle, now entering its 128th month, can be attributed to the severity of the 2008 financial crisis and the sluggish recovery that followed. Economic cycle indicators are still supportive for growth over the foreseeable future.

The fundamental backdrop for corporations and consumers remains healthy. U.S. corporations are reporting improving earnings attributable to both tax reform and healthy top line revenue growth. Consumer confidence is high, reflecting a healthy labour market, rising wages and rising home prices.

So far, Q2/18 profit growth for the S&P 500 companies are coming in better than the consensus expectations of revenues and earnings per share (EPS) growth of 8 per cent and 20 per cent year-over-year, respectively. EPS growth is expected to remain in the high teens for the balance of the year and 10 per cent in 2019, providing fundamental support for stock prices. For the TSX, EPS is expected to be up 16 per cent in 2018 and 12 per cent in 2019.

The impact of tariffs and trade wars on the global economy will be closely monitored for signs of potentially derailing the recovery.

TOP PICKS

ENBRIDGE (ENB.TO)

Enbridge is a North American energy transportation and natural distribution company. Enbridge accounts for 28 per cent of crude oil and 20 per cent of natural gas transported in North America. With 96 per cent of its cash flow underpinned by long-term commercial agreements, Enbridge’s operations are stable and predictable. Positive recent developments include regulatory approval of its Line 3 project along its preferred route, announcements to streamline its corporate structure and sale of non-core assets at attractive prices. Enbridge has reaffirmed its 10 per cent annual dividend growth guidance through 2020, while maintaining a payout ratio of 65 per cent of available funds from operation. Enbridge offers an attractive yield of 5.8 per cent. Recent purchase at the $46 level in July 2018.

UNITED TECHNOLOGIES (UTX.N)

United Technologies is well-positioned to benefit from two long-term secular growth trends: growth in commercial aviation/air travel and mass urbanization in emerging markets. The company provides products and services to building systems and aerospace industries around the world. Its four business segments are: Climate, Controls & Security (29 per cent of revenues); Pratt & Whitney (26 per cent); Aerospace Systems (25 per cent); and Otis (20 per cent). The pending acquisition of Rockwell Collins will expand its aerospace product portfolio to include avionics and interiors. By geography, the U.S. represents 38 per cent of sales; Europe, 29 per cent; Asia, 21 per cent; and the rest of the world, 12 per cent. The split between original equipment sales and aftermarket is 57 per cent/43 per cent of total revenues, with the latter providing a higher margin and more stable cash flow stream. This is a consistent characteristic across its business segments. United Technologies is a steady dividend grower, providing a dividend yield of 2.1 per cent. Recent purchase at the $134 level in August 2018.

YUM! BRANDS (YUM.N)

YUM! Brands is a global quick-service restaurant operator with over 45,000 restaurants in 140 countries. Its three iconic brands are KFC (50 per cent of operating profits), Taco Bell (32 per cent) and Pizza Hut (18 per cent). International accounts for 58 per cent of system sales, with the balance in the U.S. The latter is a mature market where value and innovation are critical, while international markets represent growth opportunities. YUM! provides a dividend yield of 1.8 per cent. Recent purchase at the $78.75 level in July 2018.