Market Call Tonight for Thursday, April 20, 2017
Lorne Zeiler, portfolio manager and wealth advisor at TriDelta Financial
Focus: Dividend stocks and macro strategy
Economic growth has been improving for a number of months, particularly in Europe, where economic data continues to surprise to the upside. Equity markets have appreciated significantly over that period, possibly outpacing the positive economic data. The U.S. market in particular appears overvalued. Europe and Japan offer much more attractive valuations. Consequently, while we started the year heavily overweight U.S. equities, we have significantly reduced our U.S. equity exposure, adding to global non-North American equities and increasing our cash position. Our focus is on quality companies with stable earnings and that generate significant free cash flows.
In Fixed Income, we had focused on credit with large positions in high-yield and corporate bonds as well as preferred shares. We benefitted from credit spreads tightening over the past year and from a renewed interest in preferred shares. Over the past month, we have improved credit quality by reducing our high-yield positions, selling most preferred shares and high grading our corporate bond positions, as we feel that credit spreads are not offering attractive risk-reward characteristics at this time. We have also lowered overall portfolio duration. Alternative assets, particularly private debt, remain a key area to enhance income and overall client returns, while lowering volatility.
ISHARES MSCI EDGE MIN VOL EAFE ETF (EFAV.K)
Canadians have generally been underweight international equities despite their potential to enhance returns and lower volatility. We feel that there are better investment opportunities in Europe and Japan versus the U.S. in the near-term due to better valuations and sustained improvement in their economies. The minimum volatility MSCI EAFE ETF offers a higher yield than the MSCI EAFE ETF and more exposure to stable, high cash flow sectors such as health care, real estate, utilities and telecommunications.
JOHNSON & JOHNSON (JNJ.N)
Johnson & Johnson has unmatched depth and breadth in the health-care sector and deservedly commands a premium valuation. Earnings will be enhanced in 2017 from the acquisition of Actelion Pharmaceutical plus modest growth from their three main divisions: pharmaceuticals, medical devices and consumer products, which should lead to full-year earnings of over $7.00 per share, a growth rate of over 15 per cent. The company has little debt and significant cash on hand for a potential future acquisition or shareholder-friendly measures.
SUN LIFE FINANCIAL (SLF.TO)
Sun Life offers a very reasonable valuation of 11.7 times earnings and a dividend yield of 3.6 per cent. The company is expected to generate eight to 10 per cent annual earnings-per-share growth over the medium term. Drivers of growth will be its Asian business where Sun Life has nearly tripled net income in past five years, its Canadian group life and asset management businesses, as well as improvement in operating margins, particularly in its Canadian disability and U.S. group life businesses.
PAST PICKS: DECEMBER 23, 2016
Apple has appreciated by over 20 per cent since the start of the year despite few of our expected catalysts coming true (tax reform, repatriation of funds and launch of iPhone 8). With iPhone 8 possibly being delayed, improved products from Samsung being launched and a likely significant delay in tax reform, we felt this was a good opportunity to take some profits.
- We significantly reduced holdings in Apple on Tuesday, April 18, 2017.
- Original purchase price was Jan. 28, 2014 at $552 per share ($78.90 based on 7:1 split). Apple would have been trading around $116.50 when I recommended it on December 23, 2016
- Sell/reduce price was $141.80
- Then: $116.52
- Now: $142.54
- Return: +22.33%
- TR: +22.85%
TransCanada should continue to reward income-focused investors with expected dividend increases of 10 per cent per year over the next five years. Higher earnings will support the dividend increases as approximately $25 billion of TransCanada’s infrastructure projects are put to service over the next two years and the Columbia Pipeline acquisition will be fully reflected in earnings. Approval of the Keystone XL pipeline approval could be a further catalyst.
- Then: $62.13
- Now: $63.57
- Return: +2.31%
- TR: +4.30%
Abbvie offers a reasonable valuation at 12 times forward earnings, strong growth profile and a high dividend rate of four per cent. Abbvie has a very strong pipeline that could see the launch of up to 10 new medications over the next few years resulting in higher future revenues and earnings, potentially offsetting a decline from Humira sales which are likely to peak in 2018/2019.
- Then: $62.34
- Now: $63.78
- Return: +2.31%
- TR: +4.42%
TOTAL RETURN AVERAGE: +10.52%
FUND PROFILE: TRIDELTA HIGH INCOME BALANCED FUND
Five-star rated fund by Globefund (Category Global Neutral Balanced)
PERFORMANCE AS OF MARCH 31, 2017:
- 1 month: Fund 1.0%*, Index** 0.8%
- 1 year: Fund 20.5%*, Index** 10.5%
- 3 years: Fund 8.6%*, Index** 7.9%
* Returns are based on reinvested dividends and net of fees
** Index: 50% BMO Aggregate Canadian Bond Index ETF (ZAG); 25% iShare S&P/TSX60 ETF (XIU); 25% SPDR S&P500 ETF (SPY) on total return basis.
TOP HOLDINGS AND WEIGHTINGS (FIXED INCOME)
- Iron Mountain 5.375% June 2026: 5.2%
- Bombardier Inc. 7.45% May 2034: 5.1%
- Transalta Corp. 6.5% March 2040: 4.8%
TOP HOLDINGS (EQUITY)
- SPDR S&P500 ETF (SPY.N): 18.2%
- Valener Inc. (VNR.TO): 1.2%
- Student Transportation Inc. (STB.TO): 1.2%