Gavin Graham, contributing editor at The Income Investor Newsletter
Focus: North American and global large caps

MARKET OUTLOOK

The emergency rate cut from the Federal Reserve yesterday reducing short-term U.S. rates to 1.25 per cent failed to have the desired effect as investors chose to worry about why the central bank felt it had to be so aggressive. With the yield on the benchmark 10-year U.S. Treasury falling below 1 per cent for the first time ever, gold up to US$1,640 an ounce and the S&P 500 and NASDAQ off 2 or 3 per cent, investors are fleeing risk assets for perceived safe havens.

The COVID-19 virus is still spreading rapidly, although the number of cases appears to be peaking in China. While it's spreading faster than SARS in 2003, the death rate appears to be much lower, especially if the number of cases is larger than estimated, as symptoms do take a while to develop. While having a sharp short-term shock on supply chains and travel, this is not a permanent condition and some recovery from its effects should be evident by the second half of 2020. In the meantime, recession looks likely in Europe and some parts of Asia with the inevitable knock-on effects on companies' revenues and earnings. The authorities have shown they will throw whatever weapons they have at the problem, though unlike the Financial Crisis, this is a biological and not a financial problem.

Rate-sensitive sectors like utilities, REITs and pipelines are beneficiaries from the rush to low rates. Financials and economically sensitive sectors like transport and manufacturing are the casualties. Gold should be a part of any portfolio as insurance against further aggressive cuts, but the importance of having a balanced portfolio with some fixed income has been emphasized by the last couple for weeks. Defensive consumer and healthcare stocks with sustainable dividend yields look attractive too. Taking sensible precautions makes sense, but it also makes sense not to panic. In the words of a poster in London, "keep calm and wash your hands.”

TOP PICKS

GLAXOSMITHKLINE (GSK NYSE)

Glaxo is one of the 10 largest pharmaceutical companies, with particular strengths in respiratory, HIV and vaccines. It’s the largest consumer healthcare business in the world after the merger with Pfizer. The stock is selling at 14 times earnings and yields 5 per cent. It hasn’t gained much in five years due to patent expiries, but it's up 25 per cent in the last two years. With its strength in vaccines, it will likely be part of any solution to COVID-19. The spinoff of its consumer business within 2 years should give a higher rating to its pharma business.

RICHARDS PACKAGING INCOME FUND (RPI-U TSX)

Richards is the largest distributor of glass and plastic packaging in Canada and the third-largest in North America. Sixty per cent of sales come from the U.S., primarily the West Coast, and the remainder in Canada. With 14,200 customers and 48 per cent of its $340 million in sales coming from food and beverage, 29 per cent from cosmetics and 23 per cent from healthcare, it’s well diversified by product and client base. The market cap is $520 million. Selling at 15 times earnings and yielding 2.9 per cent, Richards is reasonably valued for a steadily growing and profitable company. We recommended it on Feb. 20 at $45.20.

PAN AMERICAN SILVER (PAAS TSX)

While the second-largest silver producer has doubled over the last year since its merger with Tahoe, Pan American still represents an attractive play on both the metal, which is selling near a 20-year discount to gold, and growth in reserves and production with its new discoveries at the La Colorada mine in Mexico. Should the closed Escobal mine in Guatemala acquired in the Tahoe deal (which produced almost as much silver as Pan American itself) reopen, then production would expand rapidly. Recommended In January 2019 at $29.45.

PAST PICKS: SEP. 27, 2019

INTACT FINANCIAL (IFC TSX)

• Then: $133.38
• Now: $156.92
• Return: 17%
• Total return: 18%

FIERA CAPITAL (FSZ TSX)

• Then: $10.17
• Now: $11.27
• Return: 11%
• Total return: 13%

ALTAGAS CANADA (ACI TSX)

• Then: $25.79
• Now: $33.63
• Return: 30%
• Total return: 31%

Total return average: 21%