May 8, 2018

Christine Poole's Top Picks: May 8, 2018

BNN Bloomberg

Christine Poole , BNN Bloomberg

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

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MARKET OUTLOOK

Uncertainty regarding the duration of the economic and profit cycle, fears of trade wars and higher interest rates have overridden strong first-quarter corporate profits. Companies have surpassed expectations on both revenues and earnings, leading to upward revisions to consensus forecasts for this year and next. With Q1/18 earnings per share (EPS) for the S&P 500 companies expected to be up close to 25% year-over-year, the rate of earnings growth may have arguably peaked. However, 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.

Historically, the U.S. Treasury inverted yield curve has been a good predictor of economic recessions. In each of the last seven U.S. recessions, the yield curve inverted prior to the onset, with an average lead time of 15 months. In each of these periods the S&P500 didn’t peak before the yield curve inverted as well. The current spread between the U.S. 10 and two-year Treasury bond remains positive, at around 50 basis points.

Trade issues are a destabilizing influence on markets. So far, with U.S. policy being significantly less punitive than rhetoric, we’re optimistic negotiated outcomes won’t derail global economic growth.

TOP PICKS

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
Recent purchase price at the $50.50 range in March 2018.

Brookfield is a global alternative asset manager with approximately $250 billion in assets under management. The company owns and operates assets on behalf of shareholders and clients with a focus on property, renewables, infrastructure and private equity. It seeks to invest in long-life, physical assets that typically benefit from some form of barrier to entry, regulatory regime or competitive advantages that provide for relatively stable cash flow streams. The stock offers a modest dividend yield of 1.5 per cent.

TD BANK (TD.TO)
Recent purchase at the $72 range in May 2018.

TD Bank 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 (10 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 43 per cent, the lower end of its 40-to-50 per cent target. TD’s current dividend yield is 3.6 per cent.

UNITED TECHNOLOGIES (UTX.N)
Recent purchase at the $118 range in May 2018.

United Technologies provides products and services to building systems and aerospace industries around the world. Its four business segments are: Climate, controls and security (29 per cent of revenues); Pratt & Whitney (26 per cent); Aerospace Systems (25 per cent); and Otis (20 per cent). 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 aftermarket and original equipment sales is 47 per cent/53 per cent, with the former providing a higher margin and more stable cash flow stream. The pending acquisition of Rockwell Collins will expand its aerospace product portfolio to include avionics and interiors. A steady dividend grower, the stock provides a dividend yield of 2.3 per cent.