Dec 11, 2018

Christine Poole's Top Picks: Dec. 11, 2018

BNN Bloomberg

Christine Poole , BNN Bloomberg

Christine Poole, CEO and managing director at GlobeInvest Capital Management

Focus: North American large caps

MARKET OUTLOOK

Higher corporate earnings are necessary to drive stocks higher. For now consensus earnings per share (EPS) for S&P 500 companies are expected to be up eight per cent in 2019.

The largest source of risk to higher earnings is the impact of tariffs through potentially higher input costs and profit margin compression. The confusion surrounding what was agreed upon at the G20 summit as well as the eventual outcome of China-U.S. negotiations is having an extremely destabilizing effect on stock markets.

The inversion at the front end of the U.S. Treasury yield curve has fueled fears of a slowing U.S. economy and is somewhat worrisome. Inversion at the longer end of the curve, however, is a more relevant leading indicator of a pending recession and for now the spread between the 10-year and two-year Treasury bonds remains positive at 15 basis points. While high-yield credit spreads have widened recently, spreads remain relatively tight compared to levels in periods prior to the onset of a recession.

In Q3/18, the U.S. GDP growth was 3.5 per cent. Q4/18 is expected to moderate to about 2.4 per cent. Surveys from the ISM Manufacturing Index point to robust activity, which is supportive of continued economic growth into 2019.

Recent commentary from the Bank of Canada and the U.S. Federal Reserve both suggest a more dovish monetary policy going forward, as the central banks adopt a more data-dependent approach.

Trade wars and geopolitical conflicts are key impediments to ongoing corporate profit growth and higher equity markets. Any constructive developments in these areas will be a positive catalyst for markets.

TOP PICKS

PEMBINA PIPELINE (PPL.TO)

Recent purchase price at $43.50 range in November 2018.

Pembina is a diversified energy infrastructure company that operates pipelines, natural gas gathering and processing facilities, and midstream businesses. It’s well-positioned in the prolific Montney and Duvernay shale regions with secured projects in place to support its future cash flow growth over the foreseeable future. Pembina offers an attractive 5.3 per cent dividend yield.

MICROSOFT (MSFT.O)

Recent purchase at $103 range in November 2018.

Microsoft is global technology company that provides software products, support, services and devices. Their business segments include productivity and business tools, Intelligent Cloud and More Personal Computing. Microsoft is well-positioned to participate in the corporate adoption and utilization of cloud technology. Its growing recurring revenue stream and strong balance are also appealing investment attributes. Microsoft’s dividend yield is 1.7 per cent.

XYLEM (XYL.N)

Recent purchase price at $65.60 range in December 2018.

Xylem is a leading provider of water equipment and services that operates in three segments: water infrastructure (transportation, treatment and testing of water), applied water (usage in various industries), and measurement and control solutions. The company benefits from the global water industry growth drivers of better quality, scarcity and safety. Its end markets include the industrial, public utility, commercial, residential and agricultural sectors. Xylem is geographically diversified, with the U.S. representing 46 per cent of revenue; Europe, 28 per cent; Asia-Pacific, 13 per cent; and rest of world,13 per cent. Within emerging markets (21 per cent of its revenues) many regions are still building out their basic water infrastructure systems, while in developed markets maintenance and replacement of an aging system is the demand driver. Xylem provides a dividend yield of 1.3 per cent.