Jul 25, 2018

Michael Simpson's Top Picks: July 25, 2018

BNN Bloomberg

Michael Simpson , BNN Bloomberg

Michael Simpson, senior vice-president and senior portfolio manager at Sentry Investments
Focus: North American dividend stocks

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MARKET OUTLOOK

The start of earnings season has been positive: 87 companies (at the time of writing, 90 companies have reported) had positive earnings surprises, with an average positive gain of 7.8 per cent. 90 per cent of the companies reporting are beating on earnings per share and 79 per cent are beating on sales.

For U.S companies, a strong dollar could hamper results in the second half of the year. In Canada, June CPI was up 2.5 per cent, which followed a 2 per cent increase in May. The transportation index was up 6.6 per cent in June and energy costs were up 12.4 per cent. These are trends that the Bank of Canada will be watching closely.

Some analysts believe the Bank of Canada will raise rates again in October. The decision to raise rates will depend on how trade negotiations with the U.S. get resolved. We believe Canada will avoid punitive auto tariffs and a solution will be achieved in the trade file with the U.S. The two economies are closely interconnected, with over 30 states having Canada as their no. 1 export market. The free trade agreement could be expanded to include services, which would benefit the U.S.

In Canada, although retail sales were up 2 per cent in the month of June, unemployment increased to 6 per cent. The country could get a large dose of stimulus if Shell and its partners decide to go ahead with building an LNG facility in Kitimat, B.C. This will be a large, multi-year $45 billion stimulus to the Canadian economy and all regions would benefit. The last piece of the negotiation is taxes and the sourcing of steel to build the project. This LNG facility going ahead would change investor sentiment towards Canada.

At Sentry, we study the yield curve. After it inverts, it usually is a good indicator of trouble in stock markets 11 to 13 months later. The most important part of the curve in our view is the three-month to 10-year section of the curve. We’re positive on equities and certain sectors that have lagged, such as health care and technology.

On energy, oil demand is about 99 to 100 million barrels a day and we believe crude will trade in a range of $64 to $76. This is positive for the western Canadian energy sector. Higher oil prices and a lower Canadian dollar will add to profitability. AltaGas is building the Ridley Island Propane Export Terminal, which should be positive for Canadian NGL producers when it commences operations about a year from now.

Stay invested, avoid headline investing and stick to your long-term goals.

TOP PICKS

COMCAST (CMCSA.O)

Comcast provides media and television broadcasting services. The company offers video streaming , television programming, high-speed Internet, cable television and communication services. Comcast owns such properties as NBC Universal, X-finity, and the Universal theme parks.

The stock price has been weighed down by Comcast’s pursuit of 21st Century Fox media assets and Sky PLC. The company recently announced they won’t pursue the Fox bid. Comcast has 29 million customers in the U.S.

Comcast trades at 12.4 times earnings and an enterprise value to earnings before interest taxes depreciation and amortization multiple (EV/EBITDA) of seven times. It’s grown its dividend at a five-year growth rate of 14.2 per cent.

INDUSTRIAL ALLIANCE (IAG.TO)

Industrial Alliance is a Quebec-based life and health insurer with a leading position in the individual insurance market. It also operates in the group life and health, individual annuity group pension, and retail mutual fund segments in Canada. The insurer has the largest network of independent financial advisors in Canada. It’s forecast to have a return on equity of 11.8 per cent. Industrial Alliance trades at 8.8 times earnings and has a three-year dividend growth rate of 10.6 per cent.

WESTSHORE TERMINALS (WTE.TO)

Westshore operates a coal storage and loading facility on land leased from the Vancouver Port Authority. Westshore primarily ships metallurgical coal that’s used in the steel-making process. Westshore has no long-term debt and $59 million of cash. Teck Resources is their largest customer, accounting for 60 per cent of its revenues. After growth capital expenditure is finished to expand Westshore’s Roberts Bank facility, the payout ratio will drop to approximately 39 per cent. The company trades at 13.8 times 2019 earnings and an EV/EBITDA multiple of nine times. It’s the largest coal handling terminal in the western hemisphere. Other coal handling facilities in Canada are smaller and don’t have the blending facilities.