Dec 14, 2017

Michael Simpson's Top Picks: December 14, 2017

BNN Bloomberg

Michael Simpson , BNN

Michael Simpson, senior vice president and senior portfolio manager at Sentry Investments
FOCUS: North American dividend stocks
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MARKET OUTLOOK

The markets in Canada and the U.S. have produced positive returns in 2017. The S&P 500 has increased 18.8 per cent price return and the TSX is up approximately 5.3 per cent as of December 11, 2017 based on price return. We will watch inflation closely as this will be a signal for further rate increases in the U.S. We expect two rate increases in the U.S. in 2018.

In Canada, the key will be to watch the renegotiation of NAFTA and the strength of the Canadian dollar. With wage growth at 3.2 per cent (Source Trading Economics, September 2017), we must keep a vigilant eye for accelerated inflation. We believe we are in the late stages of a prolonged economic expansion in the U.S., as job growth is strong and the unemployment rate is low at 4.10 per cent. In this environment we favour equities over bonds and would favour stocks that are trading below the markets forward multiple of approximately 19 times. In the U.S., if comprehensive tax reform is finally passed, that will provide a boost to earnings and the economy.

Bitcoin has risen dramatically and there has been incredible interest in blockchain technology. Returns of 1500 per cent over one year are not sustainable and investors should resist the urge to speculate.

In Canada, a stronger U.S. economy has traditionally led to higher oil prices. However we are closely monitoring new supply from the shale regions of the U.S. and Russia and the Middle East. For investors — you should stay invested, but be prepared for more volatility and have more of a tilt towards equities over bonds.

TOP PICKS

SUN LIFE FINANCIAL (SLF.TO)
Sun Life is an insurance and global asset manager. The company provides insurance mutual funds, annuities, pensions trust and banking services. Sun Life has excellent growth prospects in Asia. They have grown at a 30 per cent CAGR over the last five years. 20 per cent of Sun Life’s earnings come from Asia. The company can generate 8 to 10 per cent earnings growth. The three year dividend growth rate is 6.6 per cent. We think Sun Life’s large U.S. asset manager MFS will show improved results. Sun Life trades at 12 times 2018 earnings and has excess cash at the holding company level.

STANLEY BLACK & DECKER (SWK.N)
Stanley Black & Decker is a global leader in power tools, hand tools, and security hardware for professional industrial and consumer use. In 2016, the company generated $11 billion in revenue across three key segments: tools and storage, security, and industrial. Have paid a dividend for 141 consecutive years and have raised a dividend for the past 50 consecutive years. Trades at 17.9 times earnings, has a good balance sheet with debt to EBITDA at 1.9 times, and a free cash flow yield of six per cent. Key brands are Stanley Black and Decker Bositch Dewalt.

ALLERGAN (AGN.N)
Allergan is a global specialty pharmaceutical company focused on the development, manufacturing, and marketing of brand pharmaceutical products with operations in 60 countries globally. Allergan currently markets over 80 branded pharmaceutical products. Recently started to pay a dividend and have the ability to grow that dividend. The company recently lost a patent for Restasis, which is about nine per cent of their sales. In a worst case scenario we believe Allergan can earn US$15.00 in 2018 and applying a 14 multiple, gives us a 210 target. Botox is a key product and generates about 20 per cent of sales. Allergan also has a good product development pipeline. They have a division contouring that is growing at 15 per cent. They have a process that kills fat cells by freezing them. If the aesthetic business was separated or spun out, Allergan would trade at a higher multiple.