Norman Levine is managing director at Portfolio Management Corp. His focus is North American large caps.
Purchased at $24.355 on October 26.
Gorman Rupp is a high-quality company operating in a single business – industrial pumps. It has a market-leading share in its stable of pumps. The company is managed by the third generation of the founding family, is virtually debt-free and produces significant cash flow as it has minimal capital expenditures. It has increased its dividend for 42 consecutive years and, although not a yield stock due to how well the stock has done over the years, currently yields 1.4 per cent. With 30 per cent of its sales outside of the U.S., the strength of the dollar has been an earnings negative, as has its exposure to oil markets. Earnings in 2015 should be down about 23 per cent year-over-year with a low single digit recovery expected for 2016. However, growth will re-emerge from stronger world economies, new product offerings, and international expansion and acquisitions. While its valuation is not cheap, it is at the lower end of its 10-year average.
Badger Daylighting (BAD.TO)
Originally bought in 2010 at $6.33 and now being bought for new clients at current prices. Badger is in the business of using high pressure water to move earth for utility and energy companies. The company has done an excellent job of growing its business in the U.S. and diversifying it away as much as possible from the energy sector during the current downturn. Earnings in the latest quarter were actually higher despite expectations that the slowness in the energy patch would severely hurt earnings. Better growth than expected in the U.S., higher revenues per truck, and good cost controls led to the higher earnings. We believe Badger will continue to outpace expectations looking forward and is a good proxy for playing the energy markets when they recover as it represents about 50 per cent of revenues. The current yield is about 1.5 per cent.
Power Financial (PWF.TO)
We have owned this company for many years and continue to buy it for new clients.
Power Financial is the financial services holding company of the Desmarais family. Through its majority interests in both Great-West Lifeco (67.1 per cent) and IGM Financial (58.7 per cent), it is a major Canadian financial services holding company. In addition, it owns a 27.8-per-cent interest in European investment company Pargesa Holdings. Prior to the financial crisis, Power Financial had a record of raising its dividend twice each year. Subsequent to the crisis, it maintained but didn't raise its dividend until March of this year, when it raised its dividend by 6.4 per cent to an annualized rate of $1.49 per share. Through a combination of higher earnings from both GWO and IGM as well as a recovering Europe aiding Pargesa, we see Power Financial's earnings growth rate increasing from the most recent 5-year annual growth rate of 6 per cent to the 15-per-cent range. This should allow Power Financial to resume its regular and frequent dividend increases. This should make PWF very attractive again to dividend investors. The current yield is about 4.5 per cent.
Past Picks: November 3, 2014
American Financial Group (AFG.N)
Then: $59.94 Now: $74.07 +23.57% Total return: +27.61%
Bank of Nova Scotia (BNS.TO)
Then: $68.78 Now: $60.83 -11.56% Total return: -7.63%
Then: $47.59 Now: $41.90 -11.96% Total return: -9.30%
Total Return Average: +3.56%
In Canada, we are in the midst of tax selling, especially the resources, banks, and rate-reset preferred shares. This will end near the end of December and then real fundamentals will again dictate the market's direction. We have been carrying large cash positions in our clients' accounts and are looking for companies and opportunities where we can spend some of that cash. Unlike the financial crisis in 2007 and 2008, where we felt the financial system was at risk, our current cash holdings are due more to valuation concerns. We are working to identify companies with strong balance sheets and good earnings outlooks, where their valuations are becoming more reasonable, and we will be buying these stocks over the next few months. Finally, we look forward to the Fed in the U.S. finally raising interest rates as we relate higher interest rates to stronger economic growth and stronger corporate earnings. It is to be welcomed, not feared.