Apr 19, 2018

Norman Levine's Top Picks: April 19, 2018

BNN Bloomberg

Norman Levine , BNN

Norman Levine, managing director of Portfolio Management Corp.
Focus: North American Large Caps

_______________________________________________________________

MARKET OUTLOOK

Following sharp corrections in mid-February and again in late March, markets are trying to mount a recovery. It’s too early to tell, though, if the recovery will be successful. The difference is that market leadership appears to be changing. Stock markets appear to be moving into late-cycle mode. This bodes well for technology, transports and commodity stocks, especially energy. But it isn’t favourable for consumer stocks, especially food, beverage, tobacco, household goods and food retailers. These stocks historically do poorly in rising interest environments. The renewed interest in energy stocks bodes well for the severely lagging S&P/TSX Composite, despite the efforts of various Canadian governments to make the country look like an unattractive place to invest.

TOP PICKS

STANTEC (STN.TO)
Bought on Sep. 14, 2016 at $30.22.

Stantec acquired a highly sought-after company (MWH) in 2016 that had good secular growth and high market share in water infrastructure. While Stantec is mainly an engineering and design firm, the acquisition came with a small portion of construction (about 7 per cent of revenues) that investors weren’t used to seeing in the results. Construction is inherently riskier than engineering and design and, in Q4/17, Stantec experienced some issues with a few legacy construction projects that had come along with its acquisition of MWH. The stock was punished, but the rest of the company was doing well with good prospects. Stantec has strong exposure to the infrastructure plans of both Canada and the U.S. and has a healthy balance sheet for acquisitions. Should it decide to carve off the construction business, the stock would be quickly rerated higher. Stantec yields 1.7 per cent.

ENBRIDGE (ENB.TO)
We’ve owned the stock for many years, but recently added to our positions on April 6 at $39.96.

Enbridge is one of North America’s leading energy delivery companies. Among other operations, it delivers approximately 65 per cent of U.S.-bound Canadian crude oil production and approximately 20 per cent of all natural gas consumed in the U.S. It also owns Canada’s largest natural gas distribution company.

Enbridge is a stock that everyone used to love and now everyone loves to hate. The company was an investor darling until its acquisition of Spectra Energy earlier this year, which helped diversify Enbridge’s dependency on oil transportation to a more balanced company with large natural gas transportation as well. But it also increased Enbridge’s leverage and reduced the expected annual dividend growth rate to 10 per cent. It means that Enbridge will need to raise a lot of money to fund its $22 billion capital plan. The uncertainty over the Line 3 replacement also overhangs the stock.

We think there’s much upside potential to the stock. Historically, stocks return, total return, 6 to 8 per cent per year, so if all we received in 2018 was the 6.4 per cent yield on the stock, we wouldn’t be terribly upset. We think there is also good upside in the stock.

PENTAIR (PNR.N)
Bought on Aug. 17, 2015 at $62.50.

Pentair is a diversified industrial manufacturing company with two reporting segments: Water (60 per cent) and electrical (40 per cent). The water division deals with filtration, flow, and aquatics, while the electrical division deals with temperature management, safety enclosures and fasteners. It has a U.K. tax residency, but operations are run from Minneapolis.

Pentair is splitting into two separate companies in May. The electrical division will be renamed nVent. Each Pentair shareholder will receive one ordinary share of nVent for every one share of Pentair, with April 17 being the date of record. The nVent stock symbol will be NVT. Both water and electrical generate solid cash flows. Spin-offs usually sell off within days of the spin. but eventually outperform the original company. Should that occur, we would use that as an excellent buying opportunity. We plan on holding both companies following their separation. Pentair has raised its dividend for over 40 consecutive years and currently has a dividend yield of 1.95 per cent.