Nov 13, 2018

Christine Poole's Top Picks: Nov. 13, 2018

BNN Bloomberg

Christine Poole , BNN Bloomberg

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

MARKET OUTLOOK

The pullback in October has reset investor expectations on future growth, dampened market euphoria and improved equity valuations. Utilities and consumer staples stocks have led the recovery from the late October bottom so far, suggesting a more defensive repositioning within equities.

With the U.S. midterm elections now behind us and the outcome consistent with expectations, the two major uncertainties facing markets are the pace of U.S. federal funds rate increases and the trade war between U.S. and China.

At its most recent meeting, the Federal Reserve reiterated its plan for further gradual tightening. The goals of central banks include currency stability, low inflation and full employment. With core personal consumption expenditures (PCE) inflation on target at 2 per cent and U.S. unemployment at a 49-year low of 3.7 per cent, there’s no reason to believe the U.S. Fed will deviate from its stated plan.

While financial markets are obsessed with higher interest rates, the consumer and business community appear to be less so. U.S. consumer sentiment and confidence as well as small business sentiment remain at near historically high levels. Manufacturing and services surveys continue to affirm robust expanding activity.

Third quarter earnings season for the S&P 500 companies is nearly complete, with earnings per share (EPS) up over 25 per cent year-over-year. Excluding the beneficial impact of lower corporate taxes, underlying EPS growth is estimated to be 17 per cent. For the year, EPS is expected to be up 23 per cent, and then moderating to 9 per cent in 2019.

Key cycle indicators don’t suggest a pending recession. Nonetheless, cautionary management commentary regarding the impact of elevated input costs, a stronger U.S. dollar, tariffs and softness in certain end markets/geographies on future profit growth is concerning. The extent to which these factors negatively impact ongoing corporate profit growth will be closely monitored.

TOP PICKS

ALGONQUIN POWER (AQN.TO)
Last purchased at $13.25 range in October 2018.

Algonquin is a North American utility company (about 75 per cent of operating profits) and provider of diversified clean power generation (about 25 per cent). The power generated from its wind, hydro and solar facilities are sold under long-term contracts. The utilities business services customers across 13 states in the U.S., providing electricity, natural gas and water transmission and distribution. Based on its development pipeline, Algonquin has targeted 10 per cent annual dividend growth until 2021. Its joint venture with Spanish-based Abengoa opens up the opportunity to develop clean energy and water infrastructure assets globally. Algonquin provides a dividend yield of 4.9 per cent.

TD BANK (TD.TO)
Last purchased at $73 range in November 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 (11 per cent annualized over the last 20 years) and 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 3.7 per cent.

MICROSOFT (MSFT.O)
Last purchased at $102.75 range in October 2018.

Microsoft is global technology company providing software products, support, services and devices. Its 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.