Mar 21, 2019

David Driscoll's Top Picks: March 21, 2019

BNN Bloomberg

David Driscoll , BNN Bloomberg

David Driscoll, president and CEO of Liberty International Investment Management
Focus: Global equities

MARKET OUTLOOK

Corporations currently have a problem: They have massive amounts of debt to repay after acquisitions, limiting the amount of money they can allocate to share buybacks and dividend increases. These buybacks have been the reason the stock market has risen as much as it has. According to data from Goldman Sachs, net purchases from companies totaled $1.6 trillion during the past three years while investors from pensions to mutual funds to individuals were sellers.

At $17.6 billion, corporate buybacks so far in 2019 are 18 times as much as the total buying from hedge funds, the only other client group that’s bullish on stocks. Charlie McElligott at Nomura cautioned investors to watch out for a market decline after the S&P 500’s 20 per cent rally from its December low. The next month is “the window for the U.S. equities pullback as supply/demand would shift,” McElligott wrote in a note. Other catalysts include quarter-end selling due to pension fund rebalancing and a pickup in Federal Reserve balance sheet runoff in the final two weeks of this month, he said.

Finally, of the companies listed in the S&P, the average dividend increase in 2018 was 11 per cent. This year, it’s been averaging 7 per cent, the historical norm but significantly lower than a year ago when companies began to pay lower corporate taxes.

For investors, it’s important to pay attention to portfolio structure through proper diversification by avoiding correlation risk in equity holdings, concentration risk of any one stock and holding enough cash to take advantage of any market corrections that may come our way.

TOP PICKS

CANTEL MEDICAL CORP (CMD.N)
Last purchased on March 20, 2019 at $67.02.

Cantel is a healthcare company that provides infection prevention (water sterilization for hospitals and dental clinics), control products and diagnostic and therapeutic medical equipment. Its diverse offerings include medical device reprocessing systems and disinfectants for dialyzers and endoscopes, water purification equipment, masks and bibs used in dental offices and therapeutic filtration systems.

The stock reached a high of $130.92, but currently trades at half that value thanks to a slowdown in the dental and life sciences businesses. However, organic revenue growth was 5.3 per cent last year and free cash flow is expected to double, which should provide a pickup in profitability. The company also installed a new CEO to help turn around its weaker businesses. Dividend growth is in the mid-teens and the payout ratio is just 8 per cent, so lots of room to grow the dividend.

ENGHOUSE SYSTEMS (ENGH.TO)
Last purchased on March 21, 2019 at $31.99.

Develops software products for automated mapping, call centres, transportation solutions, facilities management and geographic information systems. It’s a Canadian company with lots of international exposure. It currently trades near its 52-week low because revenues in the last quarter rose only 1 per cent. That’s because they didn’t make any acquisitions, which to us is a positive sign that management won’t overpay for future deals. The dividend has steadily grown in the mid-teens and the payout ratio is only 8.5 per cnet.

EXPONENT (EXPO.O)
Last purchased on March 20, 2019 at $57.27.

Exponent operates as a science and engineering consulting firm. The company performs scientific research, analysis and evaluations to solve complicated issues facing a range of industries and governments. A risky business is a potential customer for Exponent.