Stan Wong, Director & Portfolio Manager at Scotia Wealth Management
FOCUS: North American Large Caps and ETFs
Equity valuations for North American markets remain elevated. The S&P 500 Index currently trades at a multiple of 18.5x forward price-earnings while the TSX Index trades at a 19.5x forward price-earnings ratio. The historical 10-year average forward price-earnings multiple for both North American indices is closer to about 14x. However, we are constructive and selective of North American equities. Low interest rate yields remain supportive of equity prices while global policymakers have been hinting at additional stimulus measures on the fiscal side. As well, the U.S. political outlook has become somewhat clearer given the recent polling numbers. From a technical perspective, equity markets have broken above key resistance levels and are now indicating a bullish bias. Nonetheless from a seasonality viewpoint, we may experience some market volatility after the Labour Day weekend as we enter a historically weaker part of year. Any upcoming volatility should provide investors an opportunity to selectively ‘buy on dips.’ In Stan Wong Managed Portfolios, we favour more cyclical sectors including financials, technology and industrials. We seek large-cap, high quality North American companies with reasonable valuations, reliable earnings streams and dividend growth attributes. As we move into the late cycle phase of the economy and equity market, we continue to believe that the current market environment requires active portfolio management with tactical stock selection and defensive risk controls including stop loss strategies.
American Express (AXP.N); last bought this month at ~US$65;
American Express is a leading global payments and travel services company. The company’s continued focus on lending growth and cost-cutting initiatives should push shares higher. From a technical perspective, AXP shares last month broke above its long-term 200-day moving average and has formed a solid recovery from its lows earlier this year. Fundamentally, the shares are reasonably valued, trading at a forward price-earnings multiple of 12x with an estimated long-term earnings per share (EPS) compound annual growth rate (CAGR) of 8-10 per cent. AXP shares currently pay a 1.8 per cent dividend yield. Over the last 5 years, American Express shares have delivered an annual dividend growth rate of over 10 per cent.
Morgan Stanley (MS.N); last bought in July 2016 at ~US$28;
Morgan Stanley is one of the largest financial services firms in the U.S., with operations in investment banking, securities & investment management and global wealth management. Improvements in merger & acquisition fees, capital markets and net interest margins (from eventual higher interest rates) should push Morgan Stanley shares higher. Last month, MS shares broke above its long-term 200-day moving average – a positive development from a technical analysis viewpoint. The shares are attractively valued, trading at an 11x forward price-earnings multiple and a price-to-book ratio of 0.86x. MS has an Morgan Stanley shares currently pay a 2.6 per cent dividend yield which is expected to grow solidly over the new few years.
Vanguard U.S. Dividend Appreciation Index ETF (VGG.TO) last bought in July 2016 at ~C$37;
The Vanguard U.S. Dividend Appreciation Index ETF focuses on U.S. companies that have a history of increasing dividends for the last ten consecutive years. Top holdings in this ETF include Johnson & Johnson, Microsoft Corp., Coca-Cola Co. and 3M Co. As U.S. interest rates begin to move higher, companies with dividend growth attributes should outperform those with little or no dividend growth. Year-to-date and over the past one year, the Vanguard U.S. Dividend Appreciation Index ETF has outperformed the broader S&P 500 Index.
Past Picks: August 27, 2015
- Then: $89.73
- Now: $124.96
- Return: +39.26%
- TR: +39.26%
UnitedHealth (UNH.N) – Sold in February 2016
- Then: $117.77
- Now: $136.62
- Return: +16.01%
- TR: +18.02%
Walt Disney Co (DIS.N)
- Then: $102.17
- Now: $95.21
- Return: -6.81%
- TR: -5.54%
Total Return Average: +17.25%
Twitter: @StanWongWealth .