Aug 18, 2017

Norman Levine's Top Picks: August 18, 2017

BNN Bloomberg

Norman Levine , BNN

Norman Levine, managing director at Portfolio Management Corp.

Focus: North American large caps
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MARKET OUTLOOK
We remain concerned about valuations in the U.S. being stretched and despite the fact that the major indexes continue to hit new highs there, they are becoming increasingly narrow as the equal-weight S&P 500 declines while the market-weight S&P 500 increases. That reinforces our desire to hold an above-average amount of cash and to look for values in Europe, Asia and Canada.

TOP PICKS

ARC RESOURCES (ARX.TO) – Owned by clients, self and family. Bought November 2014 at $28.55.
ARC is an oil and gas exploration and production company in Western Canada. While it operates in all four Western provinces, the majority of its assets are in the Montney play in Northeastern British Columbia. The recent sale of its Saskatchewan oil assets boosts its natural gas production percentage to 72 per cent versus 28 per cent oil. It is a low-cost and high-quality producer with one of the best managements in the business — exactly what you want in this type of environment. We are positive on the long-term outlook for natural gas (much more so than oil), so view the company very favourably here. ARC has been hurt by a combination of low oil prices and negative feelings towards B.C. producers under the new government uncertainties. We believe energy prices are nearer their lows than their highs and that common sense will ultimately prevail with reference to oil and gas production and export in B.C. We would use the current weakness to buy shares. This is a long-term buy. ARC currently yields 3.8 per cent.

BRIGHTHOUSE FINANCIAL (BHF.O) – Owned by clients, self and family. Bought August 9, 2017 at $55.66.
Brighthouse is a recent spin-off from MetLife and consists of Metlife’s retail annuity and life insurance operations. On a standalone basis, Brighthouse is the twelfth largest U.S. insurance company by assets. Brighthouse was spun out to shareholders of MET in an 11-to-1 ratio. Holders of MET had to make a decision on a tiny position that appeared in their portfolios. This lack of size made it an easy sale. The lack of a dividend made it unsuitable in accounts having a dividend mandate. The lack of corporate history and recent earnings hardships due to steadily declining interest rates made it more likely to be a portfolio punt. The stock was under significant selling pressure for the reasons above, giving us the view that the company stock was trading at an attractive valuation. As long-term investors we can wait until the macro environment improves and believe the selling pressure was overdone. Its focus on annuities and wealth protection products make it a play on rising equity markets and interest rates. Brighthouse trades at only 60 per cent of book value and we expect that discount to shrink over time.

PENTAIR (PNR.N) – Owned by clients, self and family. Bought on August 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). It has a U.K. tax residency but operations are run out of Minneapolis. The company has raised its dividend for over 40 consecutive years and currently has a competitive dividend yield of 2.2 per cent. The company spins off significant free cash flow with capital expenditures relatively small. The valuation is reasonable and provides exposure to the important water industry. The recent sale of its valves and controls business to Emerson Electric at over $3.1 billion was for a good price. The company used the proceeds to pay down debt, which has fallen from $4.5 billion in the March quarter to $1.7 billion now, and a 1.2x debt/EBITDA ratio gives it a more flexible balance sheet. Next year the company will split up into two pure-play companies. The split is on track for 2Q18 and it is our current intention to own both parts following the split.