Aug 16, 2016

Christine Poole's Top Picks: August 16, 2016

BNN Bloomberg

Christine Poole , BNN

Christine Poole, CEO & managing director, GlobeInvest Capital Management

FOCUS: North American Large Caps

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MARKET OUTLOOK:

The melt up in equity markets largely reflects investor complacency that central banks around the world continue to maintain accommodative monetary policies, keeping interest rates low over the foreseeable future. Benign inflationary pressures provide flexibility to defer raising interest rates. Low borrowing costs also entice corporations to issue debt to fund stock repurchase, dividends and mergers & acquisitions.

Sustained job growth in the U.S. supports continued gains in consumer spending and housing. The former is especially important given that two-thirds of U.S. GDP comes from personal consumption expenditures. Other key economic indicators remain encouraging; the July ISM Manufacturing Index and the ISM Non-Manufacturing Index were 52.6 and 55.5, respectively, both in expansionary mode. With Q2/16 reporting largely complete, the S&P500 earnings per share was down about 3.1 per cent year-over-year (or up 1.7 per cent excluding Energy). Expectations are for corporate profit growth to turn positive in the back half of the year.

The Canadian economy continues to lag the U.S. economy, exacerbated by the Fort McMurray fires. Catalysts for future improvement include exports to a relatively stronger U.S. economy, which accounts for close to 75 per cent of Canadian exports, re-building to repair the damage from the fires and an expansionary fiscal policy to stimulate economic growth.

So far, we do not see signs of a recession and therefore, remain constructive on equities.

Top Picks:

Fortis (FTS.TO), Recent purchase price $42.70 range in August 2016

Fortis is an electric and gas utility company, with 96 per cent of its assets regulated (70 per cent electric and 26 per cent gas) and the remaining under long-term contracted hydroelectric operations. Canadian regulated operations represent 54 per cent of earnings, U.S. regulated 35 per cent, Caribbean regulated 4 per cent, and 7 per cent non-regulated energy infrastructure. The announced acquisition of ITC, a fully regulated U.S. electric transmission utility company, is expected to close by the end of 2016, and will significantly increase its footprint in the U.S. Fortis is a stable cash flow generator, posting 42 consecutive years of annual dividend increases. Fortis offers a yield of 3.5 per cent.

Cineplex (CGX.TO), Recent purchase price $50.40 range in August 2016

Cineplex is Canada’s dominate film exhibition operator with an estimated 80 per cent of Canadian box office revenues. Management maximizes revenue per patron through increasing concession spending and offering premium priced formats, including 3D films, D-BOX seating and VIP auditoriums. Alternative programming at its theatres such as the Met Opera and Dance Series is also offered to drive traffic into its theatres. Management continues to diversify its business from box office-driven revenue, including the development of The Rec Room and eSports, as well as growing its media operations. Cineplex provides an attractive 3.2 per cent yield.

Mondelez International (MDLZ.O), Recent purchase price $43.70 range in July 2016

Mondolez is the global snacking leader with #1 global share in biscuits, chocolate and candy as well as #2 in gum. Its long term earnings power is supported by an attractive demographic footprint with 44 per cent of revenues from emerging markets where the number of middle income households is expected to double over the next eight years. Per capita consumption of confectionary and biscuits in developing countries are significantly below that of developed countries. Increasing income levels drives demand within snacking categories. Mondelez provides investors with a dividend yield of 1.8 per cent.