Peter Brieger is Chairman and Managing Director at GlobeInvest Capital Management. His focus is North American large caps.
01/24 close $98.11; One year price target: $105; Target gain: 7%; Yield: 3.51%; Target Total Return: + 10.5%
Our expectations are for continuing growth in the U.S. and Canada which will be enhanced by past and future credit-card portfolio acquisitions. That growth should result in increasing dividends and a higher share price during the next several years. Based on the loonie's recent slide, Rob Sedran of CIBC World Markets estimates that the 35 per cent of earnings coming from the U.S. should be enhanced by about $0.07 per share on a full year's basis assuming a 10-per-cent decline in the Canadian dollar versus the U.S. dollar.
Crescent Point Energy
01/24 close: $39.36; One year price target $47; Target gain: 19.4%; Yield: 7.01%; Target total return: + 26.4%
CPG continues on its path to becoming Canada's leading mid-cap producer with an estimated 2014 production exit rate of about 137,000 boed. We expect that it will continue to acquire highly prospective land plays and companies with the same characteristics. It also is an industry leader in enhanced secondary recovery techniques.
01/24 close $26.30; One year price target: $28; Target gain: 6.8%; Target total return: + 11.8%
Inter Pipeline meets our criteria of a company which based on its highly successful business model will be able to show a continuing increase in cash flow per share and dividends. IPL is a leader in the transportation of oil sands product and conventional oil, oil storage and mid stream activities.
Past Picks: January 22, 2013
Then: $28.90; Now: $28.76; Total return: -0.48 per cent
Then: $109.52; Now: $98.54; Total return: -7.77 per cent
Then: $83.47; Now: $97; Total return: +20.60 per cent
Total return average: +4.12 per cent
Last Thursday's and Friday's declines might have been the initial puncture in investors' complacency balloon. While Friday's close left the TSX down 2 per cent and the S&P 500 off 3.2 per cent from recent highs, (actually the TSX is still up on the year) their behaviour no doubt has caused some investors to hark back to the 1998 currency crisis, the long-term credit scandal, the Russian default and more recently the 2008/9 decline. Given the October-to-late-December price rise, some no doubt may rush to take profits generated by that rise. Others may conclude that a repeat of the earlier periods may be possible and head to the exits to preserve what capital they have. Finally we saw an increase in short-term volatility as evidenced by last week's VIX performance: it was 1255 on the 22nd, 1367 on the 23rd and it closed the week at 1814.
So in the short-term where do markets go? As a guess we may see some continuing volatility and further declines as investors and no doubt some speculators will make whatever decisions they deem to be in their best short-term interests. We have talked for some time about the absence of any meaningful correction and we may now be in one. For example, one of our favourite indicators (The Investor Intelligence Bull/Bear Ratio) while having declined from a 4.23 reading (the highest since March, 1987) to 3.81, it remains uncomfortably above 3.0, generally a sign of market over-valuation. To put a potential downside into some perspective, the S&P 100-day moving average ("DMA") and 200 DMA are 1765 and 1712 respectively. If reached the further correction from Friday's close would be 1.4 per cent and 4.4 per cent respectively. At this point, the worst we can see would be a 10-per-cent correction which would take the S&P to 1665.
However, at GlobeInvest we continually stress the need for some perspective when considering portfolio strategy whether that perspective is short, medium or long-term. Let's consider the following:
- While the S&P 500 is off about 3.2 per cent from its high, many of the stocks on my buy list have already corrected between 6.and 9 per cent and in some cases have reached my entry points;
- Even if there is a further correction, many others may decline to my entry points which would, without blindly ignoring what the overall market is doing, cause us to start buying;
- Even with a pick-up in the latest year over year Canadian and U.S. CPI of 30 basis points in each, government bond yields continued their steady decline of between 4 – 36 basis points from year-end levels;
- Unless the decline is signalling something more sever economically (which we doubt) that should be constructive for market valuations and stock prices.
In terms of a medium- to long-term perspective given central banks' fixation on (and fear of) little or no inflation or even deflation, we should point out one prior period (1952-1960) when inflation, interest rates and markets' price earnings ratios were low. It was a period when market multiples increased substantially. While we don't endorse the view that the market multiple may rise to 19 times (Versus 14.9 last Friday) we do see the potential for a modest multiple expansion. However, going forward earnings growth will have to do the heavy lifting.
In terms of a very long-term perspective we do not think it preposterous to compare the period that started in 1980 and continues today to three prior periods of long-term price stability: the Renaissance, the Age of Enlightenment and the Victorian era which lasted approximately 70 to 80 years. Assuming that this period turns out to be similar to the prior three, and even if this is only a fifty year period that started in 1980, we still may have another 16 years of relative price stability. Far fetched as that might seem today, we think it should play a part in investors' long-term thinking especially as it relates to equities.