May 16, 2017

Christine Poole's Top Picks: May 16, 2017

BNN Bloomberg

Christine Poole , BNN

Christine Poole, CEO and managing director at GlobeInvest Capital Management

Focus: North American large caps
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MARKET OUTLOOK
The global economic backdrop is improving, with both advanced and emerging economies in an expansionary mode. The job situation in the U.S. remains robust, as evidenced by the unemployment rate declining to 4.4 per cent in April. Economic indicators and surveys continue to suggest strengthening U.S. GDP growth after a soft first quarter. The Canadian economy is recovering, supported by higher energy prices over the past year, fiscal stimulus through infrastructure investment and accommodative monetary policy.

Q1 2017 earnings reports for the S&P 500 companies are nearly complete and both revenues and earnings per share (EPS) growth have come in better than expected. So far, EPS growth is tracking at about 13.6 per cent year-over-year (the highest earnings growth for the index since Q3 2011) compared to an expected 9.2 per cent. For all of 2017, EPS is expected to be up 11.4 per cent, the first year of double-digit growth since 2011.

In Canada, with regards to the TSX, consensus estimates expect 2017 EPS to be up 23 per cent, reflecting the recovery in crude oil prices from one year ago. For example, WTI bottomed at the US$28/bbl level in February 2016. Earnings for financials, which accounts for about 35 per cent of the TSX, is also expected to improve, up 12 per cent versus up 1.5 per cent in 2016.

Our constructive view on equities is predicated on continued corporate profit growth, needed to support arguably elevated valuations relative to historical averages. Economic data, indicators and surveys as well as the U.S. Treasury Yield Curve do not suggest a recession in the foreseeable future.

TOP PICKS

CGI GROUP (GIBa.TO) – Recent purchase price $65.65 range in May 2017
CGI is a global technology services firm deriving 54 per cent of its revenues from outsourcing and 46 per cent from systems integration and consulting. Its revenue breakdown by geography consists of approximately 55 per cent from Europe, 25 per cent from the U.S., 15 per cent from Canada and five per cent from Asia Pacific. CGI services numerous sectors including financial services, government, health care, telecommunications and manufacturing. Management remains focused on creating shareholder value through profitable organic growth, accretive acquisitions at reasonable prices within a consolidating IT services market and share repurchases.

ROYAL BANK OF CANADA (RY.TO) – Recent purchase price $93.50 range in May 2017
Royal Bank’s diversified business mix consists of personal and commercial lending (50 per cent of earnings), capital markets (21 per cent), wealth management and insurance (23 per cent) and investor and treasury services (six per cent). Geographically, Canada accounts for 61 per cent of revenues, the U.S. 22 per cent and international 17 per cent. The acquisition of City National enhances its U.S. presence and accelerated growth in two attractive client segments: high net worth and commercial banking. City National’s core markets include New York, Los Angeles, San Francisco and San Diego, where the highest number of high net worth households are located. Royal Bank’s dividends are expected to grow at a similar pace to earnings growth. The stock provides investors with a current dividend yield of 3.7 per cent.

JOHNSON & JOHNSON (JNJ.N) – Recent purchase price $121.80 range in April 2017
JNJ is a global diversified health-care company, manufacturing a broad range of products within three segments: pharmaceuticals (47 per cent of sales), medical devices and diagnostics (34 per cent) and consumer (19 per cent). Approximately 70 per cent of sales are derived from products that have a No. 1 or No. 2 global share. The recently announced acquisition of Swiss-based Actelion will expand its pharmaceutical business. JNJ offers consistent stable earnings and dividend growth. One of a handful of triple-A rated companies left in North America, JNJ has increased its dividend for 55 consecutive years and offers investors a dividend yield of 2.6 per cent.