Jun 16, 2017

Norman Levine's Top Picks: June 16, 2017

BNN Bloomberg

Norman Levine , BNN

Norman Levine, managing director at Portfolio Management Corp

Focus: North American large caps
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MARKET OUTLOOK
A tale of two countries: While U.S. stock indices hit new highs, the S&P/TSX Composite heads south. And while U.S. markets are propelled upwards by technology stocks, Canada is propelled downwards by resource and material stocks, especially those in the energy sector.

While we have been expecting and hoping for a correction, this is not exactly how we envisioned it happening. We thought it would be a more general selloff in equities due to excessively high valuations, especially in the U.S.

We had a taste of it a week ago when tech stocks sold off but there has yet to be much follow-through.

Our suggestion is to keep some cash on hand to take advantage of lower prices when they occur.

TOP PICKS

GORMAN RUPP (GRC.N) – Owned by clients, self and family
Was bought at $24.355 on October 26, 2015 and currently being bought for new clients.

Gorman Rupp is a high-quality company operating in a single business: industrial pumps. It has a market-leading share in its stable of pumps. The company is managed by the third generation of the founding family, is debt free and produces significant cash flow as it has minimal capital expenditures. It has increased its dividend for 44 consecutive years and, although it’s not a yield stock due to how well the stock has done over the years, currently yields 1.8 per cent. With 30 per cent of its sales outside of the U.S., the strength of the dollar has been an earnings negative, as has its exposure to oil markets. While its valuation is not cheap, it is at the lower end of its 10-year average. With a high U.S. tax rate, the company and the stock will be a major beneficiary if the proposed tax reform comes to fruition in the U.S.

POWER FINANCIAL (PWF.TO) – Owned by clients, self, and family
We have owned this company for many years and continue to buy it for new clients.

Power Financial is the financial services holding company of the Desmarais family. Through its majority interests in both Great-West Lifeco (67.1 per cent) and IGM Financial (58.7 per cent), it is a major Canadian financial services holding company. In addition, it owns a 27.8 per cent interest in European investment company Pargesa Holdings. Prior to the financial crisis, Power Financial had a record of raising its dividend twice each year. Subsequent to the crisis, it maintained but didn’t raise its dividend until 2015, when it raised its dividend by 6.4 per cent to an annualized rate of $1.49 per share. Currently, the dividend is $1.65 and the current yield is five per cent. Great-West Lifeco’s earnings are temporarily under pressure, which has given long-term value investors a great chance to buy PWF at a very reasonable valuation and a great yield.

PFIZER (PFE.N) – Owned by clients, self, and family
We have owned this company for many years and continue to buy it for new clients.

Pfizer is one of the largest pharmaceutical companies in the world. Its global portfolio includes medicines and vaccines, as well as consumer health care products. Like other major pharmaceutical companies, Pfizer has faced patent cliffs as many of its largest-selling drugs have faced patent expiry. Pfizer has overcome some of those pitfalls by both discovering new drugs and, more importantly, acquiring other drug companies with attractive portfolios and/or promising new drug pipelines. Its most recent large acquisitions have been Wyeth in 2009 and Hospira and Medivation in 2015. Pfizer will benefit from U.S. tax reform both domestically and by being able to repatriate a huge cash position held overseas. It raises its dividend consistently and currently yields 3.9 per cent.