Peter Brieger is CEO and Managing Director at GlobeInvest Capital Management. His focus is North American large caps.
Close 11/27: $99.67; One year price target $105.00; Target gain: 5.4 per cent; Yield: 3.45 per cent; Target total return: 8.8 per cent
Based on the criteria outlined above we think continuing economic growth in the U.S. and Canada along with recent past and likely future credit card portfolio acquisitions provide excellent opportunities for product cross selling i.e. mortgages. Also should interest rates start to rise, that should help Net Interest Margins and Income. We see a continuation of dividend increase in 2014.
Close 11/27: $25.37; One year price target: $28.00; Target gain: 10.8 per cent; Yield: 5.09 per cent; Target total return: 15.9 per cent
In looking at 2014 and the prospect of flat-to-modestly rising interest rates, we look for companies whose fundamental growth and cash flow projections indicate the potential for future dividend increases. IPL, a leader in oil sands product transportation plus conventional oil gathering, oil storage and mid stream activities meets those criteria.
Crescent Point Energy
Close 12/27: $41.35; One year price target: $47.00; Target gain: 13.7 per cent; Yield: 6.7 per cent; Target total return: 20.3 per cent
CPG continues on the path to becoming Canada's leading mid-cap producer. In addition to its acquisitions of highly prospective land and production as well as companies with similar characteristics, it is an industry leader in secondary enhanced production techniques. While we expect further growth in cash flow, given its current yield we do not expect any dividend increase in the near term.
Past Picks: December 17, 2012
Total return: -62.04 per cent
Total return: +3.83 per cent
Total return: +27.91 per cent
Total return average: -10.10 per cent
As we head into 2014 my crystal ball is more clouded than usual. After such a good 2013, many are positing another good year in 2014. And while there are many positive signs, we think it would be naive to ignore some potential warning signs.
Some of the positive signs are a continuation of global growth at modestly accelerating rates. Inflation for now is flat with a modestly declining trend. Interest rates, especially at the short end, are forecast to remain low well into 2015. On the international stage, while Syria continues to be a problem, a potential rapprochement with Iran could significantly reduce Middle East political tensions and improve investor sentiment globally. Finally as memories of 2008 continue to fade, investors have become very much more positive on the outlook for equity markets.
As for potential warnings signs, the current unbridled investor enthusiasm for equities is the most immediate and worrisome. For example, the Investors Intelligence Bulls and Bears Ratio has, since 1999, fluctuated mainly between a low of 1.0 (usually a good time to buy) and 3.0 (usually a good time not to buy and possibly to sell or reduce equity positions). It is currently at a record of 4.23 compared to about 3.1 in 2007, about 3.4 in 2010 and about 3.7 in 2011. Another measure of potential over-valuation is that the S&P 500 is trading at the top of its Bollinger Band. It can stay there for a while but generally when either the market or a stock is at the top level, it is not a good time to buy. We think that looking ahead, it is logical to expect some sort of a correction but we are not sure of timing or the extent. It may occur for one or more of the following reasons or perhaps something completely different.
In our view, the major potential negative is that we are at a tipping point from which the future is extraordinarily difficult to predict. For example:
- Will the gradual reduction and eventual elimination of the Fed’s monthly bond buying program unfold exactly as the Fed thinks (guesses would be a more appropriate word) or will the past and extreme (our view) repression of interest rates and the reduction of that pressure lead to higher than expected levels?
- Will inflation remain contained or are there some potential negative surprises especially from the Service Component of CPI (about 56 per cent) relative to the Goods Component (44 per cent)?
- Will Obamacare’s problems be solved or will it prove to be a drag on the U.S. economy, especially if continuing problems lead to the introduction of a national system of health care such as in Canada?
- Can the U.S. Congress in the face of the 2014 mid-term elections work together to deal with its financial issues and possibly the Senate’s threat to impose further sanctions if in six months there is no nuclear deal with Iran?
We fully admit that we don't have know if any of the foregoing potential negatives will occur but think some recognition should be given to their potential negative impact on equity markets if one or more does, especially given the market's current over-bought position.
On a more positive note we don't rule out an expansion of the market's price earnings ratio ("PER") as happened in the 1950's when, during a period of low growth, inflation and interest rates, it rose from about 7 times in 1952 times to 21 times by the end of the decade.
Finally – and we admit the following is a little "off the wall" – there have been three prior periods in history when inflation was stable for a prolonged period. They were the Renaissance, the Age of Enlightenment and the Victorian era! Could we be at the cusp of another similar period?
To summarize, we are short-term skeptics on the market and will wait for better times to either add to current positions or initiate new ones. For those equities which have reached our one year targets, we will review their potential for the coming year.