Gavin Graham, trustee at Pointbreak ETFS

Focus: North American and global large caps
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MARKET OUTLOOK
The recent failure of U.S. health-care reform, the triggering of the Brexit process and the use of U.S. missiles in Syria have reminded investors of the risks that could cause markets to retreat. These risks are both political and economic, and with U.S. interest rates having risen by 0.5 per cent in the last three months and with another 0.5 to 0.75 per cent increase expected this year, the present high valuations and overwhelmingly bullish sentiment should remind investors of 2008 and 2000, the last time indices were this high. While unemployment is low in the U.S. and Canada, and Chinese growth appears to be strong, the rise in the S&P 500 and S&P TSX of 22 per cent and 18 per cent over the last year mean most of the good news is already reflected in stock prices, while earnings growth remains lackluster. Investors should be taking profits, moving into more defensive sectors that have lagged over the last 18 months and upgrading their portfolios. A reasonable allocation to gold, now out of its five-year bear market and the beneficiary of higher growth and inflation, also makes sense.

TOP PICKS

ALTAGAS (ALA.TO) – Most recent purchase August 2016 at $34.40, own personally and for family and recommended in Income Investor
AltaGas is a diversified utility company with one-third of its revenues and earnings each coming from pipelines, power and gas utilities, respectively, with a concentration on clean power sources such as hydro, wind and gas. They are well diversified geographically with operations in B.C., Alberta, Alaska and Michigan. Its recently announced $8.4 billion agreed takeover of Washington DC gas utility WGL will double the size of the company and should permit eight to 10 per cent growth in dividends. It yields 6.8 per cent.

AIRBOSS OF AMERICA (BOS.TO) – Recommended in Income Investor January 2017 at $12.92, no personal ownership
AirBoss is a small cap ($300 million market cap) that is the second largest rubber compound maker in North America and the sole supplier of chemical warfare resistant gloves and boots to the U.S. and Canadian military, as well as a leading supplier of noise reduction systems to automakers. While recent lower sales of compounds to the commodity complex and the end of a major boot contract caused lower revenues, leading to a sell-off in the stock, the increased level of military spending and a recovery in investment should see revenues rebounding. It yields two per cent.

ZCL COMPOSITES (ZCL.TO) – Recommended in Income Investor September 2016 at $10.93, no personal ownership
ZCL is a small cap ($450 million market cap) that is the market leader in North America for fibre-reinforced plastic (FRP) underground storage tanks  (USTs), primarily for petroleum but also for water and corrosive products. While the market for retail gas station USTs is small ($250 million), the aging steel tanks that were installed 30 years ago by gas stations need to be replaced, while the water tank market is double the size at $500 million and growing rapidly. Exposure to the oil and gas sector has held back growth for the last two years and ZCL closed down its Dualam subsidiary last year, but has seen steady growth elsewhere and raised its dividend 50 per cent when it announced its record 2016 results and a special dividend. It yields 3.3 per cent.
 

* Recommended in Income Investor

PAST PICKS: MARCH 18, 2016

EMPIRE COMPANY (EMPa.TO)

• Then: $22.07
• Now: $20.24
• Return: -8.29%
• TR: -6.27%

PASON SYSTEMS (PSI.TO)

• Then: $17.36
• Now: $19.86
• Return: +14.40%
• TR: +18.91%

UNILEVER (UL.N)

• Then: $44.96
• Now: $50.31
• Return: +11.89%
• TR: +15.57%

TOTAL RETURN AVERAGE: +9.40%
 

* Recommended in Income Investor

WEBSITE: www.buildingwealth.ca