Christine Poole's Top Picks: March 12, 2019

Christine Poole, CEO and managing director at GlobeInvest Capital Management

Focus: North American large caps

MARKET OUTLOOK

Stock markets have largely recovered from the sharp sell-off in December. Any sustainable upward move from here will be contingent on continued corporate profit growth.  Our focus remains on monitoring the underlying economic fundamentals, which do not indicate an imminent U.S. recession.

Reasons behind the disappointing and markedly subdued payroll gains in the U.S. February jobs reports include: impressive gains in January, the government shutdown and the harsh, cold winter weather. Nonetheless, job growth appears to be moderating, which optimists attribute to a constrained supply of skilled labour. The U.S. unemployment rate remains near cyclical lows at 3.8 per cent.

While still in expansionary mode, manufacturing activity in the U.S. is slowing. In contrast, the service sector has rebounded after the government shutdown. Encouragingly, consumer confidence has snapped back up in February after three consecutive months of declines.

Notwithstanding a weak Q4/18 GDP report, Canada’s labour market appears to be relatively healthy, with February’s report coming in well above consensus expectations led by strong job gains in the private sector. Wage gains rose 2.3 per cent year-over-year, the highest in five months. The unemployment rate remained unchanged at 5.8 per cent. 

Global economic growth is decelerating, as evidenced by the recent OECD report which revised its global GDP growth rate to 3.3 per cent in 2019 (from 3.5 per cent) and 3.4 per cent in 2020 (from 3.5 per cent) compared to 3.6 per cent in 2018, with significant weakness in the euro area. Policy uncertainty and persistent trade tensions are contributing to the slowdown. 

In response, central banks are taking a pause in monetary policy normalization and, in some cases, announcing stimulus measures. A negotiated trade settlement between China and U.S. would help to alleviate global growth concerns.

TOP PICKS

CHARTWELL RETIREMENT RESIDENCES (CSH_u.TO)

Recently purchased around $14.90 in March 2019.

Chartwell is the largest provider of seniors housing communities in Canada. Demand for seniors housing is robust, driven by an ageing population and increased life expectancy. According to Statistics Canada, the 75 plus senior population in Canada will more than double from 2.7 million in 2018 to 5.5 million in 2036. The industry is relatively fragmented, with the top 15 retirement home operators accounting for 38 per cent of total suites. Chartwell offers retirement homes across the continuum of care: independent living (five per cent), independent supportive living (73 per cent of suites), assisted living (five per cent), long-term care (16 per cent) and memory care (one per cent). Chartwell provides an attractive income yield of 3.9%.  

ROYAL BANK (RY.TO)

Recently purchased around $100 in January 2019.

Royal Bank’s diversified business mix consists of personal and commercial lending (49 per cent of earnings), capital markets (21 per cent), wealth management and insurance (25 per cent) and investor and treasury services (five per cent).  Geographically, Canada accounts for 61 per cent of revenue, the U.S. taking 23 per cent and international at 16 per cent. Royal Bank’s dividends are expected to grow at a similar pace to earnings growth. The stock provides investors with a current dividend yield of 4.0 per cent.

UNITED TECHNOLOGIES (UTX.N)

Recently purchased around $124 in March 2019.

United Technologies provides products and services to building systems and aerospace industries around the world.  Its four business segments (listed by per cent of revenues) are: Carrier (28 per cent), Pratt & Whitney (28 per cent), Aerospace Systems (25 per cent) and Otis (19 per cent). By geography, the U.S. represents 38 per cent of sales, Europe at 29 per cent, Asia with 21 per cent and rest of world takes 12 per cent.  The split between aftermarket and original equipment sales is 47 per cent to 53 per cent, with the former providing a higher margin and recurring cash flow stream.  UTX has announced plans to spin-off Otis and Carrier which are expected to be completed by mid-2020.  A steady dividend grower, this stock provides a dividend yield of 2.3 per cent.

PAST PICKS: March 8, 2018

ALGONQUIN POWER (AQN.TO)

• Then: $12.94
• Now: $15.10
• Return: 17%
• Total return: 23%

GENERAL DYNAMICS (GD.N)

• Then: $226.65
• Now: $168.77
• Return: -26%
• Total return: -24%

UNILEVER (UL.N)

• Then: $53.73
• Now: $54.37
• Return: 1%
• Total return: 5%

Total return average: 2%

WEBSITE: globe-invest.com

TWITTER: @christine_globe