Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps
Equity markets exited 2016 with a resounding boom, buoyed by the pro-growth initiatives announced by President-elect Trump and risk-on sentiment, generally favouring more cyclical sectors. Undoubtedly, equities have discounted, to some extent, the positive economic impact through multiple expansions, as there are a lack of specifics on Trump’s tax reform and fiscal stimulus through infrastructure spending for analysts to adjust earnings estimates upwards. For now, investors appear willing to support elevated valuations, while largely ignoring the potentially negative implications of Trump’s protectionist policies, including anti-free trade and lower immigration levels/mass deportations. The resurgence of the U.S. dollar is also a headwind to profits for U.S.-based multinationals.
Economic data indicates a growing U.S. economy, an improving Canadian economy and growth generally surprising to the upside in the Eurozone and China. Business optimism and consumer confidence are rising above pre-recession levels. Signs of stabilization in the energy and commodity complexes are also encouraging.
The Q4/16 reporting season for the S&P 500 companies will commence later this week, with consensus expectations for 4.6 per cent year-over-year earnings per share (EPS) growth. Current consensus calls for EPS to grow 12.4 per cent in 2017 (which excludes the potential upside from corporate tax cuts) compared to an estimated one per cent in 2016. With stock market valuations above historical averages, profit growth is necessary to support higher stock prices.
CGI GROUP (GIBa.TO)
CGI is a global technology services firm deriving 54 per cent of its revenues from outsourcing and 46 per cent from systems integration and consulting. Its revenue breakdown by geography consists of 53 per cent in Europe, 27 per cent in the U.S., 15 per cent in Canada and five per cent in Asia Pacific. Management remains focused on creating shareholder value through profitable organic growth, accretive acquisitions at reasonable prices within a consolidating IT services market and share repurchases. Recent purchase price $64 range in December 2016.
Visa is a global payments technology company, operating the world’s largest retail electronic payments network and providing financial institutions with a broad range of platforms for consumer credit, debit and prepaid payments. Within developed markets, growth in transaction volume is more cyclically driven by the level of personal consumption expenditures. In emerging markets, however, the penetration of electronic payment formats is relatively low and represents a secular growth opportunity. Visa is reasonably priced given its earnings growth profile and offers a dividend yield of 0.8 per cent. Recent purchase price $78 range in December 2016.
Xylem is a leading provider of water equipment and services, operating in two segments: water infrastructure (transportation, treatment and testing of water) and applied water (usage in various industries). The company will benefit from the global water industry growth drivers of water quality, scarcity and safety. Its end markets consist of: industrial 44 per cent; public utility 33 per cent; commercial 14 per cent; residential seven per cent; and agricultural two per cent. Xylem is geographically diversified with the U.S representing 41 per cent of revenues, Europe 32 per cent, Asia Pacific 13 per cent and the rest of the world 14 per cent. Within emerging markets (21 per cent of its revenues), many regions are still building out their basic water infrastructure systems, while in developed markets, maintenance and replacement of an aging system is the demand driver. Xylem provides a dividend yield of 1.3 per cent. Recent purchase price $49.40 in January 2017.
PAST PICKS: FEBRUARY 9, 2016
- Then: $701.02
- Now: $823.87
- Return: +17.52%
- TR: +17.52%
HOME DEPOT (HD.N)
- Then: $113.86
- Now: $135.73
- Return: +19.20%
- TR: +21.74%
- Then: $48.75
- Now: $51.43
- Return: +5.49%
- TR: +8.60%
TOTAL RETURN AVERAGE: +15.95%