Christine Poole's Top Picks: Jan. 10, 2019

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

MARKET OUTLOOK

Most major stock indexes around the world posted double-digit declines in the last quarter of 2018, resulting in overall negative returns for the year. Reasons behind the steep selloff included concerns of the U.S.-China trade war, softening global economic data, the abrupt collapse in crude oil prices and a flattening U.S. Treasury yield curve, which culminated in a mass exodus from equity mutual funds and ETFs in December. Funds flow from computer-driven trading programs also exacerbated the selloff.

Our view remains that stock markets are experiencing corrections or panic attacks and adjusting to a slower pace of economic as well as corporate profit growth in 2019.

Cycle indicators indicate expanding U.S. economic activity, albeit at a moderating rate. The employment situation in the U.S. remains healthy with preliminary reports suggesting holiday retail sales were the strongest in six years. Growth in GDP is expected to slow from 2018, but remain positive.

With growth in the U.S. economy decelerating and the Chinese industrial economy contracting, we think there is an incentive for both sides to reach a mutually beneficial trade agreement. China has also been ramping up stimulus measures to support its economy.

U.S. Fed Chairman Jerome Powell has recently adopted a more dovish tone and has said that the Fed’s policy is not on a fixed course and that it reacts to changes in the economy. Recall that in 2016, despite projecting four rate increases in December 2015, the Fed went on pause for a year and raised its benchmark rate just once in December 2016 due to worries of a growth slowdown in China and a collapse in crude oil prices. Should economic conditions slow materially, we suspect the Fed will react similarly. In Canada, policy decisions will also be data dependent and given a softening economy, further interest rate increases appear to be on hold.

For our constructive view to hold, corporate profits have to continue to grow this year, which will provide fundamental support for stocks. Consensus earnings per share (EPS) for the S&P 500 companies is expected to be up 13 per cent year-over-year for Q4/18, 23 per cent for all of 2018 and 7 per cent for 2019. As companies report their results in the coming weeks, we will receive better clarity on the profit outlook.

TOP PICKS

TD BANK (TD.TO)
Recent purchase at $70 range in December 2018.

TD is a leading North American bank, deriving 60 per cent of its net income from Canadian retail operations, 28 per cent from U.S. retail, 8 per cent from wholesale/capital markets and 4 per cent from TD Ameritrade. A strong balance sheet and capital position, a track record of consistent dividend growth (11 per cent annualized over the last 20 years) combined with attractive valuation metrics makes TD a timely investment for both income and growth-oriented investors. Its dividend payout ratio is 42 per cent, the lower end of its 40 to 50 per cent target. TD’s current dividend yield is 3.9 per cent.

ABBOTT LABS (ABT.N)
Recent purchase at $68.50 range in December 2018.

Abbott is a diversified global healthcare company operating in four segments: Established pharmaceuticals (15 per cent of sales), diagnostics (24 per cent), nutritionals (24 per cent) and medical devices (37 per cent). Its products are sold in over 150 countries with 65 per cent of sales outside of U.S. and 42 per cent of sales coming from emerging markets. Abbott offers an attractive dividend yield of 1.8 per cent and has raised its dividend for 47 consecutive years.

VISA (V.N)
Recent purchase price at $131 range in December 2018.

Visa is a global payments technology company, operating the world’s largest retail electronic payments network and providing financial institutions with a broad range of platforms for consumer credit, debit, and prepaid payments. Visa benefits from the ongoing global secular shift from cash/cheque to card-based and electronic payments. Visa is also a natural beneficiary in the growth of e-commerce/online retail spend. Visa is reasonably priced given its earnings growth profile and offers a dividend yield of 0.7 per cent.

PAST PICKS: JAN. 9, 2018

NUTRIEN (NTR.TO)

• Then: $65.70
• Now: $66.28
• Return: 1%
• Total return: 4%

DISNEY (DIS.N)

• Then: $109.94
• Now: $112.80
• Return: 3%
• Total return: 4%

FORTIS (FTS.TO)

• Then: $44.80
• Now: $45.46
• Return: 1%
• Total return: 6%

Total return average: 5%

TWITTER: @christine_globe
WEBSITE: globe-invest.com