Michael Simpson - Top Picks
Michael Simpson, senior VP and senior portfolio manager, Sentry Investments
Focus: North American dividend stocks
After a robust 2016, returns from the markets in North America will be more moderate.
There are several concerns the market will face in 2017.
Firstly, the speed of interest rate increases. The Federal Reserve in the U.S. is talking about three possible rate hikes. This will depend on the strength of the U.S. economy and how the economy responds to proposed tax changes and infrastructure spending.
For Canada, a nation built on trade and close economic integration with our largest trading partner (the U.S.), the introduction of a Border Adjusted Import Tax will lead to a great deal of uncertainty.
Our best guess on how tax policy evolves is that the most draconian elements of the proposed tax change will not be implemented, and you will have lower corporate tax rates in the U.S.
In Europe the focus will be on the evolution of Brexit and elections in France, Italy and the Netherlands.
We expect volatility to increase in 2017 and will take advantage of opportunities in the market that are caused by policy uncertainty. Stay invested and use volatility in the market to take advantage of opportunities.
We are not forecasting any rate increases in Canada in 2017.
GILDAN ACTIVEWEAR (GIL.TO)
Gildan Activewear manufactures and sells apparel products in the U.S., Canada, Europe, Asia Pacific and Latin America. It operates in two segments: Printwear and Branded Apparel. The Printwear segment designs, manufactures, sources and distributes un-decorated activewear products comprising of T-Shirts. Fleece and sport shirts are produced under Gildan, Gildan Performance, Anvil, Comfort Colors, American Apparel and New Balance Brands. It trades at a forward PE of 14 and P/CF of 10x. Projected ROE of 21 per cent and return on capital of 14.8 per cent. A strong balance sheet with debt to cash flow of 1.3x. Five-year dividend growth of 22 per cent.
CVS HEALTH (CVS.N)
CVS provides integrated pharmacy health care services. It operates 9,655 retail drug stores under the CVS banner in the U.S. The Pharmacy Benefit Management division offers pharmacy benefit management solutions, such as plan design and administration, formulary management mail order and specialty pharma services. They get about 39 per cent of their EBITDA from their PBM division. They can partner with insurance companies because they do not have an insurance division. CVS could benefit from a reduction in tax rates. CVS trades at 13.2x forward earnings, 9.5x P/CF, and has a five-year dividend growth of 27 per cent.
INFORMATION SERVICES CORPORATION (ISV.TO)
ISV provides registry and information services to the province of Saskatchewan. The company provides land titles, surveys, directory, personal property registry and corporate registry for individuals and business. The company has a monopoly on land registration business in Saskatchewan until 2033. EBITDA margins of 38 per cent. Trades at 15x earnings and 9.5x EV/EBITDA. As potash and oil prices rise, the economy of Saskatchewan will improve.
PAST PICKS: JANUARY 22, 2016
MORNEAU SHEPELL (MSI.TO)
- Then: $14.55
- Now: $18.67
- Return: +28.31%
- TR: +34.16%
- Then: $31.38
- Now: $32.36
- Return: +3.12%
- TR: +9.17%
MAGNA INTERNATIONAL (MG.TO)
- Then: $49.82
- Now: $56.99
- Return: +14.39%
- TR: +17.23%
TOTAL RETURN AVERAGE: +20.18%
FUND PROFILE: SENTRY DIVERSIFIED EQUITY SERIES F
PERFORMANCE AS OF DECEMBER 31, 2016:
- 1 month: Fund 2.8%, Index* 1.7%
- 1 year: Fund 13.4%, Index* 21.1%
- 3 years: Fund 9.5%, Index* 7.1%
* Index: S&P/TSX
* Identify if your fund’s returns are based on reinvested dividends. Returns provided must be net of fees!
- CVS Health Corporation
- Morneau Sheppell
- AGT Food & Ingredients
- Linamar Corporation
- Interfor Corporation