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Keith Richards.
Keith Richards.

BNN Market Call

Three top picks from ValueTrend’s Keith Richards Add to ...

Keith Richards is portfolio Manager at ValueTrend Wealth Management of WorldSource Securities. His focus is on technical analysis.

Top picks:

Cash

I will continue to hold 40 per cent or more cash, as I have for the entire summer, and will do so until at least after the Sept. 18 Fed meeting — seasonal weakness is being amplified by Fed tapering paranoia, so best to stay liquid.

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Pembina Pipeline

We just bought this last week near $32. Good earnings report recently — beat consensus and raised dividend. Stock is nearing its long-term trendline, sector is oversold (Fed paranoia) and my fundamental guy feels this is the best value in the sector. Nearterm price objective is to old resistance point of $35 by the winter, and will likely go higher (trend is up!). Yield is 5 per cent.

Parkland Fuel

We just bought this last week near $17. Near termed target is $18.50 by the winter, then higher if it breaks that (trend is up!). Good solid quarterly financial report recently — beat consensus. They buy and own fuel distribution arms, and own a few gas stations. They distribute about half of their profits in dividends and reinvest the rest by acquiring small fuel distributors to grow their network. Six-per-cent yield while you wait for the stock to finish consolidating. It traded sideways in 2010, uptrend in 2012 and sideways again much of this year. It will eventually break out, and you get paid well to wait — current pricing is in the middle of its trading range so I am comfortable with $17 entry point.

Past Picks: July 8, 2013

BMO S&P/TSX Equal Weight Banks Index ETF
Then: $18.04
Now: $19.13
Total return: +6.35 per cent

iShares S&P/TSX Canadian Preferred Share Index Fund
Then: $16.74
Now: $15.98
Total return: -3.85 per cent

Cash (third pick)

Total return average: +0.83 per cent

Market outlook:

We're excited! Right on schedule, the market has begun selling off. Perfect for those of us holding cash, and looking for the bargains over the coming 1-2 months! Seasonals are usually weak in the fall, and the cumulative advance /decline line for the NYSE has recently exhibited a divergence. It made two “flat” peaks recently, while the S&P 500 made two higher peak leading into August. This indicated that the market was due for a correction, based on the lack of broad participation.

The selloff of interest-sensitive stocks in particular has created some attractive values lately. Interest-sensitive stocks are those stocks that pay high dividends, with a smaller expectation for growth. After the U.S. Federal Reserve statements in June, these stocks, along with bonds and preferred shares, fell sharply. Examples of interest-sensitive stocks include pipelines, utilities, REITs, telecoms, and other high-yielding positions. While not all of these stocks are of "interest" to me (excuse the pun), there are some very cheap stocks that are likely to offer both high dividends and price appreciation potential – the upside coming largely from an oversold recovery in share price. Two of my top picks today represent such values, and we expect that we will be buying more of these undervalued equities closer to the end of September or into October.

On the subject of “when to buy”: September does have a well deserved reputation for market weakness – its only positive about 40 per cent of the time. Ironically, October is not, on average, a bearish month. In fact, it’s been (on average) mostly positive. But October, when bad, is really bad! October 1987’s Black Monday and October 1997’s Asian Contagion, not to mention October 2002 and 2007 all come to mind as prime examples of nasty Octobers. October has a tendency to experience bigger down movements in the infrequent times it is down. You might say that October’s problem is a geometric one rather than an arithmetic one! So I’ll stick my neck out and bet that markets will remain volatile with a negative bias until near the end of September—and I’ll play it by ear from there. This year, seasonal tendencies for weaker markets will be amplified by market paranoia over how much (no longer if or when) “tapering” will take place. I would expect that September 18 (next Fed meeting) will be an important day for the markets — it will likely be at that point where Ben Bernanke will spell out the details we’ve all be waiting for. I won’t guess as to what October will bring. It really all depends on the outcome of the Sept 18 Fed meeting. All eyes will be on Ben Bernanke. Should he suggest a relatively modest QE tapering plan, the markets may take it as a positive. Look for a bullish October if that’s the case. Should he introduce a dramatic tapering plan — look out below.

So, I’ll be holding my 40-per-cent cash allocation until the latter part of September, or later, depending on how things play out after the September 18.

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