Feb 17, 2017

Christine Poole's Top Picks: February 17, 2017

BNN Bloomberg

Christine Poole , BNN

Christine Poole, CEO and managing director at GlobeInvest Capital Management

Focus: North American large caps
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MARKET OUTLOOK
The strength and resilience of equity markets since the U.S. election suggest investors are confident that Trump’s proposed growth policies, including tax reform and easing financial regulations, will be implemented. For now, investors do not seem to be overly concerned by U.S. protectionist rhetoric and ongoing political turmoil.

Our constructive view on equities is predicated on an improving global economy, accompanied by rising corporate profits. In the U.S., employment is stable and healthy, with the unemployment rate at or below 5.0 per cent since September 2015. Manufacturing and services industries are expanding, as evidenced by the U.S. ISM at 56 and ISM Non-manufacturing at 56.5 in January 2017. Consumer confidence and sentiment are rising, at the highest levels since the 2008/09 recession. The NFIB Small Business Optimism Index has rebounded sharply over the past three months, to the highest level since December 2004.

The Canadian economy is on the mend, posting stronger than expected GDP growth in November. Encouragingly, Canada’s merchandise trade balance recorded its second consecutive monthly surplus. Exports represent about 33 per cent of Canadian GDP, with the U.S. accounting for 75 per cent of Canada’s exports.

Economic growth in the Euro-zone and China appears to be stabilizing, generally surprising to the upside. Global Purchasing Managers Indexes (PMI) are rising and solidly above the critical 50 level.

Q4/16 reporting season for the S&P 500 companies is well underway, with about 75 per cent of the S&P 500 companies having reported. Actual earnings per share (EPS) is coming in better than expected, up 9.5 per cent year-over-year versus consensus expectations of six per cent. It appears that Q2/16 was the last quarter of negative YOY EPS growth. Current consensus calls for EPS to grow 12.0 per cent in 2017 (which excludes any beneficial impact from reducing the corporate tax rate from 35 per cent to 15 per cent) compared to an estimated one per cent in 2016.

In addition, the proposed corporate tax reduction on repatriated earnings from 35 per cent to 10 per cent could bring substantial cash back to the U.S. and fuel further stock buybacks and dividend payments. With stock market valuations above historical averages, EPS growth is necessary to support higher stock prices.

TOP PICKS

FORTIS (FTS.TO)
Fortis is a North American electric and gas utility company, with 95 per cent of its assets regulated (70 per cent electric and 25 per cent gas) and the remaining under long-term contracted power generation operations. Its recent acquisition of ITC Holdings Corporation, a fully regulated U.S. electric transmission utility company, significantly increases its footprint in the U.S. Fortis is a stable cash flow generator, posting 43 consecutive years of annual dividend increases. Supported by a backlog of projects, Fortis has targeted average annual dividend growth of six per cent through 2021. Fortis offers a yield of 3.7 per cent. Recent purchase price: $42.10 range in February 2017.

JOHNSON & JOHNSON (JNJ.N)
JNJ is a global diversified health-care company, manufacturing a broad range of products within three segments: pharmaceuticals (45 per cent of sales), medical devices and diagnostics (36 per cent) and consumer (19 per cent). Approximately 70 per cent of sales are derived from products that have a #1 or #2 global share. The recently announced acquisition of Swiss-based Actelion will expand its pharmaceutical business. JNJ offers consistent stable earnings and dividend growth. One of a handful of triple-A rated companies left in North America, JNJ has increased its dividend for 54 consecutive years and offers investors a dividend yield of 2.7 per cent. Recent purchase price: $112.90 range in January 2017.

XYLEM (XYL.N)
Xylem is a leading provider of water equipment and services, operating in two segments: water infrastructure (transportation, treatment and testing of water) and applied water (usage in various industries). The company will benefit from the global water industry growth drivers of water quality, scarcity and safety. Its end markets consist of: industrial 42 per cent, public utility 36 per cent, commercial 14 per cent, residential six per cent and agricultural two per cent. Xylem is geographically diversified with the U.S representing 41 per cent of revenues, Europe 32 per cent, Asia Pacific 13 per cent and the rest of world 14 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 1.5 per cent. Recent purchase price: $47.50 in February 2017.