Peter Brieger is chairman and managing director, GlobeInvest Capital Management. His focus is North American large caps.
TD Bank (TD-TSX)
Consensus one year target: $59.30; target one year gain: 5.7%; yield: 3.6%; target total return: + 9.3%; (Some individual one year price targets have increased to $65.00).
The three-year case for TD continues to be its presence in the U.S. market based on the expected growth in the U.S. economy. The current chair has considerable U.S. experience. Also, the Canadian outlook may not be as bad as some have opined. Further credit card acquisitions are possible which can open up considerable cross-selling opportunities.
Inter Pipeline (IPL-TSX)
Consensus one year target: $35.35; target one year gain: 12.8%; yield: 4.7%; target total return: + 17.5%
The case for IPL is that regardless the recent severe volatility in oil prices, the world will need ongoing supplies for the foreseeable future, regardless of price. The long-term demand for Canadian oil either for WTI or oil sands product, will keep the pipelines busy for years. Long-term cost of service or fixed fee contracts will continue to produce rising cash flow and rising dividends.
Consensus one year target: $147.85; target one year gain: 15.6%; yield: 3.0%; target total return: + 18.6%
The case for Agrium is the rising demand for protein from the developing nations' populations. That said, agricultural products' prices can be cyclical but the world's corn crops need their annual injection of nitrogen, AGU's key product. Additionally, the potential of increasing free cash flow of as high as $11 per share by 2017 opens the door for further increases in the dividend from the current $3.80 to as much as $4 to $5.
Past Picks: April 28, 2014
Hertz Global Group (HTZ-NYSE)
Then: $27.58; Now: $20.94 -24.08%; Total return: -24.08%
Crescent Point Energy (CPG-TSX)
Then: $44.03; Now: $32.00 -27.32%; Total return: -22.03%
Then: $104.55; Now: $125.64 +20.17%; Total return: +24.05%
Total return average: -7.35%
As of last Friday's close, two of the four major North American stock indexes were at new highs (S&P 500 and the Nasdaq composite) and two close to theirs (S&P/TSX composite and the Dow Jones industrial average). Their price earnings' ratios ("PER") based on consensus 2015 earnings were at levels not seen since '03 – '04. Also that we are in the sixth year of the current bull market have some asking "How much further can these markets go?" While I concede that 2015 PER are high relative to recent levels, looking at consensus 2016 earnings and beyond, their PER are at more reasonable levels. Therefore, while having noted for some time that a 5-to10-per-cent correction can take place at any time for a variety of reasons, I remain solidly bullish for the next several years.
Let me outline some of the current investor angst and my responses:
- I think the current recovery, given the severity of the 2008/09 decline, could take as much as a decade to fully recover. That implies we have another three years or more before we reach that point;
- However, in an ongoing bull market, short-term events can cause short-term worries. For example, the impact of things such as a brutal winter, a U.S. west coast port strike and a sharply rising U.S. dollar, has resulted in some disappointing data and has raised questions about the longevity of the current economy’s and markets’ recovery;
- Also questions about the timing of any U.S. Fed-sponsored increase in interest rates as well as the outlook for 2015/16 oil prices, have added to this angst not to mention continuing geo-political problems.
My responses/comments are:
- In addition to the slower and potentially longer recovery period from the 2008/09 episode, I think we may also be in a transition period similar to the 1974 – ’80 oil shock when the world moved from a low cost energy environment to a higher cost one;
- The disruptions caused by this move forced industry and consumers to adjust to this new environment sometimes quite painfully;
- I think it is possible that this time the shift will see a return to an environment of lower prices i.e. say $50 to $75 per barrel of WTI. (That is a guess at this point);
- This time the adjustment will be considerably less painful for business and the consumer and be a powerful ongoing stimulus to the world’s economies and stock markets;
- There will be some pain for the energy industry. At the moment there appears to be a disconnect between oil industry executives and stock market participants, the former being very cautious about how quickly and to what level prices will recover and the latter who have already concluded that we have seen the lows for oil prices and have marked up energy share prices accordingly; I am not sure that the latter is right;
- Winter is behind us as is the west coast port strike and hopefully this will result in less volatile data being reported as we move through 2015.
- The U.S. dollar, if indeed it carries on, will be a continuing headwind for the U.S. economy and corporate profits. That to some extent depends on the spread between U.S. and European interest rates; For example, 10 year U.S. and German government bonds currently yield 1.9 per cent and 0.167 per cent respectively. On a global basis North American bonds are relatively attractive to non- North Americans while not to us, and continuing capital inflows from abroad will continue to exert upward pressure on the U.S. dollar;
- As for stock markets, nothing will kill them faster than a reverse yield curve as happened in early 2000 and late 2006. I don’t think the Fed is at all anxious to see a flattening of the yield curve i.e. rising 2 – 5 year yields relative to the 10 to 30 year yields, as so much of the U.S. economy is very sensitive to short-term rates i.e. housing and related activities;
- When rates finally start to rise and eventually they will, I think it will be in baby steps and therefore, should not cause any problems for stock markets.
While I agree that in the very short-term stock markets are extended, we continue to find some value where a stock has for whatever reason, pulled back from its recent high.