Apr 16, 2018

Christine Poole's Top Picks: April 16, 2018

BNN Bloomberg

Christine Poole , BNN

Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps

_______________________________________________________________

MARKET OUTLOOK

The global economic recovery is under threat from growing trade protectionism. Heightened speculation about a trade war along with geopolitical tensions have increased market volatility and price swings.

Reported economic data, indicators, manufacturing and services survey data and sentiment measures suggest economic growth is sustainable, with no signs of a recession on the horizon. Historically, an inverted yield curve precedes the onset of a recession. The U.S. Treasury yield curve is flattening, but still positive. Stocks also have never peaked before the yield curve inverted.

The upcoming earnings season should provide significant fundamental support for equities. Q1/18 earnings per share (EPS) for the S&P 500 companies is expected to be up 17 per cent year-over-year and, after factoring the typical pace of beats, EPS growth may surpass 20 per cent. Growth is broad-based, with all sectors expected to report both positive revenue and earnings growth.

With the recent pullback, valuations are now looking more reasonable with the price to earnings (P/E) multiple for the broad market indexes is closer to historical averages. For the TSX, the forward P/E is 15.1 times compared to 18.2 times at year-end and the long term median of 15.0 times. Similarly, for the S&P500, the forward P/E is 16.8 times versus 18.6 times at the end of 2017 and the long-term median of 15.5 times.

While the trade dispute is nothing more than a war of words for now, it does add a new risk to global economic growth. As witnessed by the U.S. tariffs on steel and aluminum imports, policy was substantially less severe than initial rhetoric. The apparent progress in NAFTA negotiations and President Trump’s consideration in rejoining the TPP provide optimism that U.S.-China trade differences can be resolved with minimal economic disruption.

TOP PICKS

CHARTWELL RETIREMENT RESIDENCES (CSH_u.TO)

Chartwell is the largest provider of seniors housing communities in Canada. Demand for seniors housing is robust, driven by an aging population and increased life expectancy. According to Statistics Canada, the 75-years-plus senior population in Canada will more than double from 2.5 million in 2016 to 5.5 million in 2036. The industry is relatively fragmented, with the top 15 retirement home operators accounting for 43 per cent of total suites. Chartwell offers retirement homes across the continuum of care: independent living (5 per cent), independent supportive living (72 per cent of suites), assisted living (5 per cent), long-term care (17 per cent) and memory care (1 per cent). Chartwell provides an attractive income yield of 3.9 per cent. Recent purchase price at the $15.10 range in April.

ALPHABET (GOOGL.O)

Alphabet is a global technology company, providing the world’s leading search engine, Google, which dominates in both global desktop and mobile search engine queries. Google benefits from the secular shift to online advertising, which garners about 35 per cent of global advertising budgets and will continue to grow. Other growth areas include Google Cloud, Waymo and YouTube. Recent purchase price at the $1,030 range in April.

GENERAL DYNAMICS (GD.N)

General Dynamics is a global aerospace and defense company. Its business segments include: information systems and technology (29 per cent of sales); aerospace (26 per cent of sales), where they manufacture Gulfstream business jets; marine systems (26 per cent of sales) as the leading manufacturer of submarines and ships for the U.S. military; and combat systems (19 per cent of sales), manufcaturing combat vehicles, machine guns and grenade launchers. General Dynamics will benefit from meaningful higher U.S. defense spending over the next few years as well as an improving business jet market. The dividend yield is 1.7 per cent. Recent purchase price at the $219.50 range in April.