Jul 24, 2018

Robert McWhirter's Top Picks: July 24, 2018

BNN Bloomberg

Robert McWhirter , BNN Bloomberg

Robert McWhirter, president at Selective Asset Management
Focus: Canadian dividend stocks and small-caps

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MARKET OUTLOOK

China’s Shanghai Composite Index declined 20 per cent from its high earlier this year to the end of June, reflecting concerns of Chinese and global economic growth slowdown and the expected impact of a China-U.S. trade war. National Bank economist Krishen Rangasamy recently noted that Chinese goods exported to the U.S are 3.3 per cent of China’s GDP, which is the lowest in at least 20 years, but also that the U.S. still accounts for 19 per cent of the country's overall merchandise exports.

While U.S. economic indicators are still strong, European economic indicators rolled over almost a year ago. This has caused zinc and copper prices to decline significantly .The price of lumber has declined below its 200-day moving average due to unexpectedly weak U.S. housing starts.

Investors are closely watching the yield curve (the spread between U.S. 10-year and 2-year U.S. bond yields), which has narrowed to 29 basis points. Historically, when the yield curve inverts (the 2-year yield rises above the 10-year yield), a U.S. recession follows.

Credit Suisse strategist Jonathan Golub recently noted that yield curve inversion "won’t signal doom."

"While a [yield curve] inversion has preceded each [U.S.] recession over the past 50 years, the lead time is extremely inconsistent, ranging from 14 to 34 months,” Golub said. ”Importantly, equities rose 15 per cent to 16 per cent on average in the 18 months following [yield curve] inversions."

We expect equities will continue to rise for the next 12 months. We believe that our consistent, long-term, quantitative Canadian Dividend Strategy that looks for above-average growth at below-average valuations will continue to do well.

TOP PICKS

ATS AUTOMATION TOOLING (ATA.TO)

ATS designs and builds custom engineered, turn-key automated manufacturing and test systems.

The company reported on May 17. Year-over-year sales per share grew 11 per cent, with a 38 per cent increase in earnings per share (EPS). This was an 8 per cent earnings surprise. Earnings estimates have increased 11 per cent in the past 90 days. Earnings are forecast to grow by 11 per cent in calendar 2018, with further EPS growth of 15 per cent forecast for 2019. The rising earnings drive a 21 per cent increase in return on equity (ROE) to 10.2 per cent for 2018 versus 8.4 per cent a year ago.

ATS is expected to report earnings on August 8. Forecast: $0.20 versus $0.17, an 18 per cent increase. On July 10 Joe Farrell, head of research at Velocity Trade Capital, noted that: ATS has broken out above the neckline of a 15-year inverse head and shoulders reversal pattern. The huge base breakout continues to target further technical upside in excess of $30." This implies potential upside of 56 per cent.

CP RAIL (CP.TO)

CP Rail provides freight transportation services and logistics solutions in North America. It has a 1 per cent yield , a modest 14 per cent payout ratio of four-quarter trailing cash flow.

CP reported on July 18. Year-over-year sales per share grew 9 per cent, while EPS grew 14 per cent. EPS is forecast to grow 17 per cent in 2018, giving a 29 per cent ROE with 13 per cent further EPS growth forecast for 2019. CP is expected to report earnings on October 16. Forecast : $3.56 versus $2.90, a 23 per cent increase.

On July 18, Farrell noted that CP has "successfully retested the neckline of a 3-year rounding base breakout. The base continues to support further measured upside in excess of $360.” This implies potential upside of 41 per cent. CP is held in the Canadian Dividend Strategy.

EMPIRE CO (EMPa.TO)

Empire sells food through full service and discount service retail stores. It has a 1.6 per cent yield , a modest 15 per cent payout ratio of four-quarter trailing cash flow.

Empire reported on June 28: Year-over-year sales per share grew 2 per cent, while EPS grew 64 per cent and free cash flow per share grew 220 per cent, giving a 6.1 per cent free cash flow yield. EPS is forecast to grow 27 per cent in 2018, giving a 11.4 per cent ROE with 29 per cent further EPS growth forecast for 2019 with a 14.5 per cent ROE. Empire is expected to report earnings on September 13. Forecast: $0.43 versus $0.33, a 29 per cent increase. Empire is held in the Canadian Dividend Strategy.