Mike Newton, portfolio manager and director at Scotia Wealth Management
Focus: North American large caps and ETFs
Anxiety levels have picked up in recent months. However, as was the case with the extreme volatility that accompanied the Brexit vote in late June and early July, over-analyzing various political scenarios can take investors' focus away from factors that matter more. The recent bout of market weakness has taken valuations down a couple notches. Both the TSX and S&P are back down to about 16x consensus estimates for the next 12 months. There is potential now to generate significant and sustainable gains if you begin to position more aggressively during periods of pronounced weakness in the context of a positive economic backdrop. Caution on investment often peaks as Americans head to the polls, and recedes in the months that follow. Any pilot will tell you that any landing you can walk away from is a good one. Of course, unpredictability could still reign if we do not get a clear outcome this week, in which case we would quickly reposition our portfolios to a scenario where the election is just the beginning of volatility, rather than the end.
ALLIED PROPERTIES REIT (AP_u.TO) – Most recent purchase October 16 at $36.80
Allied Properties REIT is Toronto's dominant landlord in the niche brick-and-beam mixed-use segment. The REIT's approximately 10 million sq. ft. property portfolio comprises primarily of century-old historical buildings that have been restored, renovated and modernized. The majority of the properties are located in the Toronto central business district to the immediate west and east of the downtown core (38 per cent of portfolio). While Allied has recently seen unit price pressure post quarterly results, it has typically recovered and a return to attractive growth remains in the cards for 2017. Allied continues to hit many of the right notes in a potentially rising interest rate environment. With valuation back near net asset value, a good entry point into a high-quality REIT has surfaced. I think investors are getting a very unique future development pipeline for next to nothing today. While it may take time to materialize, Allied's "land bank" is extremely valuable and can ultimately drive three to four per cent annual NAVPU growth over the next decade. Shares currently yield 4.30 per cent.
ROPER TECHNOLOGIES (ROP.N) – Most recent purchase July 25 at US$166
Roper Technologies is a diversified technology company headquartered in Sarasota, Florida. They make high-tech industrial equipment and analytical instruments for oil and gas producers, semiconductor equipment makers and industrial companies. Sales are divided, spread between medical and scientific imaging (34 per cent), RF technology (29 per cent), industrial technology (21 per cent) and energy systems and controls (16 per cent). Roper has carefully selected the global niche markets in which it participates. These end markets are characterized by their need for value-added, engineered products, which provides Roper with the opportunity to earn above-average margins. They are typically the market leader or a competitive alternative to the market leader in most of the markets in which it competes. Right now, end markets related to energy remain weak and hang over the share price.
DIGITAL REALITY TRUST (DLR.N) – Most recent purchase September 20 at US$94
Digital Realty Trust owns, acquires, repositions and manages technology-related real estate. Digital Realty Trust targets high-quality, strategically-located properties containing applications and operations critical to the day-to-day operations of technology industry tenants as well as corporate and institutional data-centre users. This data-center REIT should benefit from continued cloud migration and outsourcing of enterprise IT workloads. Interest rate fears have helped send REITs tumbling over the past few months, with the REIT index down from 15 per cent from its July highs. DLR will continue to benefit from its high occupancy level (90.4 per cent in Q2) and increasing lease spreads as demand growth outpaces capacity expansion in a number of markets. Analysts expect 20 per cent sales growth in 2016 aided by the acquisitions and capacity increases. DLR's 3.75 per cent dividend yield is above the peer average and is well supported by cash flows.
PAST PICKS: JANUARY 26, 2016
NEWELL BRANDS (NWL.N)
- Then: $38.18
- Now: $50.41
- Return: 32.03%
- TR: 33.69%
ALIMENTATION COUCHE-TARD (ATDb.TO)
- Then: $62.13
- Now: $66.85
- Return: 7.59%
- TR: 7.99%
- Then: $601.25
- Now: $787.75
- Return: 31.01%
- TR: 31.01%
TOTAL RETURN AVERAGE: +24.23%