Jul 29, 2016

Lorne Zeiler's Top Picks: July 29, 2016

BNN Bloomberg

Lorne Zeiler , BNN

Lorne Zeiler, Vice President and Portfolio Manager, TriDelta Investment Counsel

FOCUS: North American Dividend Stocks & Portfolio Strategy

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MARKET OUTLOOK:

Equity markets have moved higher over the past few weeks despite the Brexit vote and numerous geopolitical concerns. Equity performance has been uneven with many dividend focused names and those with positive earnings surprises providing most of this upside. Markets have punished those companies experiencing near-term weakness or where earnings growth is expected but 6-12 months in the future. While both earnings and revenues have significantly beaten expectations this quarter, this is likely to be the sixth quarter in a row with negative earnings growth. In addition, we feel that the market has not priced in the strong possibility of the Federal Reserve raising rates later this year. Therefore, we feel taking some caution is warranted.

On the fixed income side, we feel that bond yields are likely to rise somewhat from their current low levels and that particularly in Canada that credit spreads are likely to tighten further. As a result, our bond portfolios are mainly made up of corporate issuers; we have slightly shortened the duration of our portfolios; and we have added preferred shares both to increase yield and for protection against potentially rising interest rates. We have also been increasing client weightings to certain alternative investments, such as private credit and asset based lending, for their relatively high levels of income, low volatility and low correlation with the bond and equity markets.

Top Picks:

Lyondelbasell (LYB.N)

Recent purchase: $78.21 on July 15, 2016

Based in the Netherlands, it is one of the largest plastics, chemicals and refining companies in the world. This stock saw earnings growth of over 150 per cent during the past five years, which has since moderated significantly, accounting for its poor relative performance over the past year. Technically the stock has recently bounced off $70 which has been support for the last three years and usually leads to periods of outperformance. LYB should appeal to income investors due to its strong history of dividend growth, high current dividend rate of 4.3 per cent coupled with a low payout ratio of only 35 per cent. Value investors should be attracted to its cheap valuation trading at only 8 times current earnings, and the company’s leading industry position.

Computer Program & Systems (CPSI.O)

Recent purchase date and price: $39.79 on June 30, 2016

Computer Program & Systems is a healthcare information technology company that designs, develops, installs and supports IT systems primarily for smaller community hospitals and acute care facilities across the United States. The stock sold off over 25 per cent from its 52 week high set in February due primarily to higher rates of client attrition from its recent acquisition of Healthland Centriq. Consequently the market has discounted the company’s many positive developments: The integration is ahead of schedule and the synergies are higher than anticipated; its sales pipeline is at its highest level since 2010/2011 and up 150 per cent year over year; and they are likely to attract even more business due to a new compliance requirement, which many smaller software vendors in this market cannot support. Valuation based on 11 times forward earnings is quite reasonable and it pays a high dividend yield is at 6.3 per cent.

BMO S&P/TSX Laddered Preferred Share ETF (ZPR.TO)

Recent purchase: July 5, 2016 at $9.55

This ETF invests solely in rate reset preferred shares with the reset dates staggered throughout the next 5 years. The ETF offers tax-efficient distributions (dividends) of approximately 5.5 per cent. Preferred shares are paying a much higher yield spread to corporate bonds than their historic average and rate reset preferred shares are attracting a much higher level of institutional investment on new issues. As well, with 5 year government of Canada bonds (this is the benchmark upon which the dividend rates for these preferred shares are based) reaching a low of nearly 0.50 per cent earlier this year, there is the strong possibility that these rates may increase. It is one of the few income investments that not only protects against rising rates, but could also go up if interest rates were to actually increase.