Peter Brieger is CEO and managing director of GlobeInvest Capital Management. His focus is on North American large caps.
- Close 11/22: $25.80;
- One year target price: $28.00;
- One-year target gain: 8.9 per cent;
- Yield: 5.0 per cent;
- One-year target total return: + 13.9 per cent.;
- Most recent purchase price: $25.98; date: 11/21.
One key element of investor demand is the sustainability of and potential increases in cash flow and dividends. Given the nature of past and recent contracts, we see the potential for meeting that objective.
- Close 11/22: $97.73;
- One-year target price: $105.00;
- One-year target gain: 7.4 per cent;
- Yield: 3.0 per cent;
- One-year target total return: + 10.4 per cent;
- Last price paid: $87.35; Date: 08/02
As the Canadian and U.S. economies continue their growth, TD’s opportunities particularly in the U.S. to expand its credit card business as well as increasing its cross selling (i.e mortgages) to credit card holders among other things, we see a continuing growth in earnings and dividends.
- Close 11/22: $21.87;
- One year target price: $27.00;
- One year target gain and total return: +23.5%.
- Most recent purchase price: $21.91; date: 10/25.
With the increasing likelihood that the Fed will pursue a very low interest policy at the short end of the yield curve, it should keep mortgage rates contained and therefore, increase the demand or housing. This along with a continuing demand from China and Japan will help Canfor’s continuing growth.
Past Picks: November 26, 2012
Total return: -13.34 per cent
Total return: +13.90 per cent
Central Fund of Canada
Total return: -38.50 per cent
Total return average: -12.65 per cent
“The devil is in the details!” Prior to yesterday morning, there were two major issues/uncertainties confronting stock and bond markets. The first was just how the Fed was going to deal with the tapering process and contain its impact on short-term interest rates. The second was just how quickly and successfully Obamacare would be implemented. Yesterday another was added. A deal with Iran whereby in exchange for the easing of some sanctions, it would put some aspects of its nuclear program “on hold” and grant a greater level of inspections! Details of a comprehensive deal will be worked out during the next six months to a year. No doubt the path will be littered with mainly political potholes as especially in six months the U.S. Congress will be in the heat of mid-term elections. One question potentially emanating from a long-term deal is when and how much oil will Iran be allowed to ship to the West and if in any serious quantity, what would the impact be on world oil prices and on inflation.
And that segues into stock and bond markets today. The U.S. stock markets so far have had an excellent year because as Doug Porter, Chief Economist for BMO Capital markets put it: “Many of our worst fears going into 2013 were simply not realized.” The U.S. economy continued to grow even though the rate coming out of a recession has been well below the maximum, average and minimum since 1948 (RBC Capital markets). Perhaps one major surprise was the decline in the annualized CPI from 1.3 per cent in Canada and 1.9 per cent in the U.S. at the start of the year to last Friday’s 0.7 per cent and 1.0 per cent respectively. Another surprise was the increase in the TSX and S&P 500’s forward price earnings ratios from 12/31/12 to last Friday. The TSX’s increased from 12.2 to 13.2 and the S&P’s from 13.2 to 15.0. And all this in the face of significant increases in Canadian and U.S. government yields for the 5, 10 and 30 year maturities! The 2-year yields were basically flat.
So aside from the three issues mentioned above, what should we be looking at as we approach this year-end and start 2014? We don’t see inflation being a problem during the next year or so. For example, while the Consumer Services sector of the U.S. CPI is running at an annualized 2.4-per-cent rate with some components running higher, the Consumer Goods sector is running at a negative annualized 1.1-per-cent rate with some components running lower. On a broader basis this is also reflected in the year to date 6.6-per-cent decline in the Thomson Reuters CRB Index.
On the interest rate front we also do not see much to worry about unless the Fed’s attempts to ease its way out of its dilemma of how to end tapering and convince bond market participants that it really wants to maintain something akin to a zero rate interest policy (“ZIRP”) to 2017, goes seriously wrong. As real rates in Canada and the U.S. have risen significantly, that may well put a lid on how far rates can rise from here. For example, historically a holder of a 10-year government bond would normally demands a 2.0-per-cent real return. As of last Friday in Canada and the U.S., real returns were 1.88 per cent and 1.74 per cent respectively.
We expect economic growth and corporate profits to continue their upward growth but once again, not as rapidly as in past cycles. So the last question to ask is “What about price earnings ratios?” One school of thought states that in a low inflation environment i.e. 1.0 per cent to 3.0 per cent, the markets’ PER could rise to as high a level as 19.
There is precedent for that view if one looks back to the 1950s. Post the Korean War, the S&P 500’s PER was about 7. During the 50s, inflation was mainly below 3.0 per cent and corporate profits were flat. As stocks yielded more than bonds, (sound familiar?) that was one contributing factor in the increase in the PER to 21 by the end of the decade. At 19 times the current ’14 and ’15 estimated EPS for the S&P 500, it would put the index at 2280 and 2470 respectively.
At this point we are not in that camp. In the short-term, stock markets are over-bought and we think can have a 5-per-cent to 10-per-cent correction at any time for reasons that are always obvious after-the-fact. Nevertheless, markets may rise into the year-end and into early 2014. For now, our most optimistic case is for a 16 PER which would put the S&P 500 at 1,920 in 2014 and 2080 in 2015. As for particular stocks, we will not chase them but wait until we think they represent real value.
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