Full episode: Market Call Tonight for Wednesday, March 28, 2018
David Driscoll, president and CEO of Liberty International Investment Management Inc.
Focus: Global equities
We expect increased volatility across all asset classes – stocks, bonds, commodities and real estate — meaning investors have to be patient and diligent to find buying opportunities. Stock valuations still appear to be stretched. The market could easily go sideways for the next two years until earnings catch up to current prices. Or, in the interim, the stock market could fall 20 per cent to return to proper equilibrium.
For investors, it’s important to:
- Hold cash to prepare for market corrections or to take advantage of buying opportunities. We currently hold 20 per cent cash times the client’s equity weighting. If the portfolio is 100 per cent equities, they’ll hold 20 per cent cash. If the asset mix is 50 per cent stocks and 50 per cent fixed income, they’ll hold 10 per cent cash (50 per cent multiplied by 20 per cent).
- Stop reaching for yield. A stock’s current yield isn’t as important as the dividend growth rate. The average dividend payer on the TSX Index increased its dividends by 9 per cent this year. For the S&P 500 Index, it was 11 per cent. Dividend growth is necessary to offset inflation. Buying a stock with a high yield but no dividend growth means that inflation eats away at an investor’s spending power and the value of the investment deteriorates over time. This is especially bad for retirees.
- Take advantage of opportunities. If a stock drops 20 per cent more than the overall market performance and there’s nothing wrong with the business model, this often presents buying opportunities.
Last purchased on March 27 at 24.79 euros.
Atlantia manages transport infrastructure. The company provides electronic tolling systems, airport automation and traffic information services. It manages toll road networks in Italy, Brazil, Chile, India, Poland and now Spain as wells as airports in Rome and Nice.
The company trades at a normalized 14 times earnings, yields 4.82 per cent and its dividend has risen an average of 10 per cent a year, which is above the median of global stocks. Atlantia and Real Madrid chairman Florentino Perez agreed earlier this month to jointly buy Spanish company Abertis, which operates more than 5,000 miles of highways, including a network in France that’s considered its most attractive asset.
Last purchased on March 26 at $64.39.
Paychex provides comprehensive payroll and integrated human resource and employee benefits, outsourcing solutions for small-to-medium-sized businesses. It gets to invest payroll remittances to the IRS every other weekend – every quarter-per-cent increase adds $3 million to Paychex’s net profits.
The stock currently trades around 22 times earnings and yields 3.3 per cent. It benefits greatly from the recent corporate tax cuts (35 per cent tax rate to 21 per cent), which should enable the company to raise its dividend by 10 per cent a year or more. The stock price fell after recent earnings as its margins will drop 2 per cent, with the company using the tax cuts to free up capital to make acquisitions in Europe and invest in technology.
TOROMONT INDUSTRIES (TIH.TO)
Last purchased on March 26 at $55.40.
Toromont sells, rents and services Caterpillar construction equipment and power systems in the provinces of Ontario, Quebec, Manitoba, the Maritime provinces and Nunavut. It also manufactures and distributes refrigeration and process systems throughout North America – warehouses and ice rinks.
Its recent purchase of Hewitt gave it new territories in Quebec and the Maritimes and provides it with greater pricing power to take advantage of increases in infrastructure spending by the federal government and improvements in demand in the mining sector. The company just raised its dividend by 23 per cent and yields 1.65 per cent.
PAST PICKS: MAY 19, 2017
BECTON DICKINSON (BDX.N)
A global medical technology company engaged in the sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The company began as a major manufacturer of syringes. It recently merged with C.R. Bard, which gives them greater exposure to ostomy care, catheters and colostomy bags.
- Then: $184.13
- Now: $212.42
- Return: 15.36%
- Total return: 17.02%
Littelfuse makes fuses and other circuit protection devices for use in the automotive, electronic and general industrial markets. It also makes LED lights and sensors. With the surge in electrification demand, Littelfuse should benefit from the need for fuses. Its first dividend was issued at $0.60 a share in 2010 and it has grown since then to $1.48 a share, an annual increase of 18 per cent.
- Then: $158.33
- Now: $201.61
- Return: 27.33%
- Total return: 28.31%
DASSAULT SYSTEMES (DSY.EPA)
Dassault provides CAD/CAM software applications services designed to support their clients’ innovation processes. Dassault helps in the 3D design process of a product or idea by calculating the best way to build it at the lowest cost. Earnings have been helped by sales to new clients and ongoing upgrade support and service to existing clients.
- Then: €82.15
- Now: €110.10
- Return: 34.02%
- Total return: 34.89%
Total return average: 26.74%