Jul 19, 2018

Tim Regan's Top Picks: July 19, 2018

Tim Regan , BNN Bloomberg

Tim Regan, managing director at Kingwest & Company
Focus: North American equities

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MARKET OUTLOOK

Trade wars, inflation and rate hikes have been at the forefront recently. Considering all this, the consensus is still for growth of close to 3 per cent for the balance of 2018. High levels of business and consumer confidence should persist into next year, with growth expected to continue throughout 2019 at a 3 per cent rate.

In this environment, the stock market should do pretty well. Stock prices aren’t expensive now. The median price-to-earnings ratio is well below the level of six months ago — at a reasonable 16.6 times earnings in the U.S. — due to strong earnings growth over the period and the U.S. corporate tax cut. In Canada, the market trades at 16.1 times.

There’s one caveat: This is nearing the longest market expansion on record. It’s aging, but still a bull market. How long it can continue? It may be a delicate balancing act going forward, suggesting we err on the side of caution.

TOP PICKS

BOMBARDIER (BBDb.TO)

As of July 1 Bombardier is only a minority owner of the CSeries, the development of which has cost the company so much. Airbus, the new majority partner, has taken no time to make its presence felt. On July 8, Airbus announced a massive order from JetBlue Airways for 60 new planes with an option on an additional 60. JetBlue will replace its current fleet of Embraer A190 regional jets with the now renamed A220. As we’ve maintained, this is an exciting new plane with substantial cost advantages.

Atmosphere Research Group fleet analyst Henry Harteveldt said that this is a "completely new airplane" with a fuel efficiency that would allow JetBlue to carry "20 to 30 more passengers for free." The airplane is a big leap forward and we expect more major orders to follow.

Bombardier stock, which we have suffered with for a few years, has been one of the best performers in our portfolio this year and we’re confident that the outlook is still rosy. Average cost: $3.70. Most recent purchase: $3.80. Value estimate: $8.

NORTHWEST HEALTHCARE PROPERTIES REIT (NWH_u.TO)

NorthWest owns a high-quality portfolio of 149 medical office and hospital properties comprising 10.1 million square feet of gross leasable area located throughout major markets in Canada, Brazil, Germany, Australia and New Zealand. The portfolio is characterized by particularly long leases (with an average expiry of 12.7 years), making income highly predictable, and high occupancy (96.3 per cent overall, 99 per cent in international operations). Rent increases are annual and based on inflation in international operations, and contractual in Canada.

Our economy is characterized by both a growing population of aging and rapidly rising expenditures on healthcare. NorthWest is well suited to take advantage of both of these trends by participating in the highly predictable real estate segment of the market. The company is expanding its portfolio in Australia both by adding to existing properties or building new facilities already leased at very favourable terms. In Germany and Brazil, it’s acquiring new properties with favourable, long-term leases to creditworthy tenants. Furthermore NorthWest is redeploying its capital by selling mature assets at very favourable prices and redeploying that capital in higher-yielding newer properties.

NorthWest has developed a very experienced organization led by Paul Della Lana who started the business. The shares offer a dividend yield of 7 per cent, a growing stream of dividends, and it trades below the net asset value of its real estate, one of a very few REITs which sell below the value of their real estate. NorthWest is up quite bit since we first bought it, but the outlook is even brighter now. Average cost: $9.47. Most recent purchase: $10.72. Value estimate: $12.

TD BANK (TD.TO)

Canada’s best bank, TD is also growing stronger in the U.S. The Canadian retail business earns over 40 per cent return on equity and excess capital is deployed into a growing U.S. business. It now has over 1,200 locations south of the border and is a top 10 bank in the U.S. by assets. Smart capital deployment and a low valuation for an oligopolistic player (13.5 times and 3.5 per cent yield). Average cost: $32. Most recent purchase: $75. Value estimate: $90.00.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
BBDb	Y	Y	Y
NWH_u	Y	Y	Y
TD	Y	Y	Y

FUND PROFILE

KINGWEST CANADIAN EQUITY PORTFOLIO

The investment objective of the Kingwest Canadian Equity Portfolio is to provide investors with superior returns through investing in undervalued companies of all market capitalizations that are publicly traded on major Canadian markets.

1 Month: 1.5% fund, 1.7% index
1Year: 12.7% fund, 10.4% index
3 Year: 13.0% fund, 7.0% index
5 Year: 12.8% fund, 9.2% index
10 Year: 8.6% fund, 4.2% index

* Index: S&P/TSX TR.
* Net of fees dividends reinvested.

TOP 5 HOLDINGS AND WEIGHTINGS