Oct 13, 2016

Michael Simpson's Top Picks: October 13, 2016

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 TSX has enjoyed a strong year. As of October 12, 2016, it is up 12.1 per cent. We do not expect to see continued outperformance from some of the strongest performers this year, such as Teck Resources, up 365 per cent, Ivanhoe Mines, up 286 per cent, Endeavour Mining, up 178 per cent and Klondex Mines, up 136 per cent. The mining and energy sectors have propelled the TSX this year. The S&P 500 is up 7.97 per cent in U.S. dollars but up only 2.37 per cent in Canadian-dollar terms.

While the market is focused on the U.S. election and the path of interest rates, we are anticipating a Hillary Clinton victory, which would be a short-term positive for the market. After the U.S. election in early November, the market will focus on earnings and the interest rate decision by the U.S Federal Reserve on December 14. It is our belief that the Fed will raise rates by 25 basis points and signal that further rate increases will be gradual and over a long time period.

The U.S. economy is showing stronger growth than Canada, and we think certain companies are undergoing an inventory correction. Consumer confidence in the U.S. is improving and retail spending, although not robust, is enough to maintain the economy.

With regards to the oil market, the market is focused on what type of supply-curtailment agreement we get from OPEC. Previous quotas were not adhered to and not all OPEC members want to cut. OPEC production at 33.2 million barrels is high and the largest producer in the world, Russia, desperately needs to keep cash coming into the country and is not interested in cutting production. New oil sands investments (projects) in Canada will need higher prices to facilitate production.

We think equity markets over the next 12 to 18 months are a better alternative to the fixed-income market.

MICHAEL SIMPSON’S CATALYSTS TO WATCH

Who wins the U.S. presidential election
Do the Democrats sweep both Houses of Congress?
Chinese growth
Italian banking sector
Strength of the U.S. Dollar

TOP PICKS

LOWE’S COMPANIES (LOW.N)

Lowe’s is the second largest home improvement retailer. The company has stores in Canada, the U.S. and Mexico through a network of over 2,100 stores.
Lowe’s is investing more to target the professional contractor. It is also investing more in technology to improve their e-commerce offering.
It trades at a lower valuation than Home Depot.
If housing starts in the U.S improve from the current 1.1 million to closer to the long-term average of around 1.4 million, Lowe’s will benefit.
Trades at 16 times earnings.
Generates free cash flow of 3.9 billion for a free cash flow yield of 6.5 per cent.
Dividend growth of 25 per cent over the last three years.

SHAW COMMUNICATIONS (SJRb.TO)

Shaw Communications provides cable and internet services primarily in Western Canada. They have acquired Wind Mobile with one million customers, which will allow them to offer the quadruple play in Western Canada.
Shaw trades at eight times EBITDA, has a 4.5 per cent dividend yield and a 4.5 per cent free cash flow yield.
Shaw will be the least impacted by the CRTC’s decision to lower the prices for wholesale internet rates, as most of the wholesale activity is concentrated in Ontario and Quebec.
They could sell assets such as ViaWest, a U.S. Data Center company, or their shares of Corus Entertainment, to help fund network upgrades
Five-year dividend growth rate of six per cent.

MACDONALD DETTWILER & ASSOCIATES (MDA.TO)

Macdonald Dettwiler sells satellite and advanced technology solutions in the surveillance and communications markets. Its customers include global satellite operators, government entities and other corporations.
The company recently restructured so that it could bid on classified U.S. government space and military satellite contracts.
Trades at 13 times earnings with an ROE of 23 per cent and a five-year dividend growth rate of eight per cent.
The U.S government is the largest buyer of space technology, and MDA has world-class technology in areas such as space robotics, earth observation and communication satellites.