Portfolio manager and financial analyst John Kim picks two US blue chip stocks as his current ‘best buys’: CVS Health Corp. and AT&T Inc.
Caution is the name of the game between now and the first months of 2020, predicts Toronto financial analyst John Kim. “It’ll be a volatile market,” he says. “We’re probably towards the highs right now (among US stocks).”
Mr. Kim is a portfolio manager and chartered financial analyst at Aventine Asset Management, which he joined about a year ago, although he has been a part of the industry for around a quarter-century in total. Expanding on his view, the portfolio manager stresses that the United States markets have the most room to fall given recent gains. By comparison, the Canadian market, while also fairly close to its highs, has not rallied as dramatically.
“Global markets are a bit lower than that, obviously,” he adds.
Mr. Kim attributes the changing investing climate to a worldwide acknowledgment that economies are slowing down based on earnings forecasts and other indicators.
Downward pressure on interest rates
Widespread anticipation of US Federal Reserve interest rate cuts (in line with recent commentary from its board) and other central banks such as the European Central Bank following suit and otherwise providing stimulus, is a sign of this trend, he argues.
US President Donald Trump has been pushing Federal Reserve board chair Jerome Powell to cut the benchmark interest rate again, after another cut earlier this summer.
“In Canada, there’s a growing chorus saying that Canada has to cut as well,” the analyst says, pointing out that domestic employment figures in July showed that the number of jobs declined.
From Mr. Kim’s perspective, the split is about 50-50 between those arguing for more stimulus to maintain growth and those who argue it would further weaken market confidence.
Asked what he believes lies ahead for the markets in light of the interest rate debate, the analyst is reluctant to share. “I will just tell you what the probability is,” he replies with a laugh.
Small rate cut shouldn’t affect markets
Mr. Kim states that he is “almost certain” a US interest rate cut will occur soon. However, on balance, investors are unlikely to adjust their behaviour because of a small rate cut of 25 basis points, especially given that interest rates have been very low in historical terms for so long already, he says.
In response to these conditions, “We have already moved to a fair bit of cash in our client portfolios”. By contrast, he notes, “We really haven’t added much on the fixed-income side. It’s probably still better to buy into good companies with strong dividend growth.” Keeping a pool of cash is better than buying bonds since one need not worry about yields dropping if interest rates fall.
2 US blue chip stocks to buy
The analyst advises staying away from resource stocks, particularly base commodities, in North America. “Even though they may be closer to their lows, they can always take another leg down,” he says. As for recently-rising gold, he suggests it is too unpredictable to bet on. Instead, he favours defensive sectors and companies with very strong balance sheets and a “very resilient top line”.
Accordingly, Mr. Kim picks two US blue chip stocks as his ‘best buys’: CVS Health Corp. (NYSE—CVS) and AT&T Inc. (NYSE—T).
“It’s had a rally over the last little while but I think it’s still undervalued,” he says of healthcare stock CVS. Its acquisition of health insurer Aetna Inc. (unveiled last year) is still incomplete pending court approval. After months of waiting, the analyst explains: “The expectation seems to be now that the judge will grant it.”
The company currently trades at a price-to-earnings ratio of less than 10, the lowest ratio since the 1980s, according to Mr. Kim.
Following its latest quarterly results (which included four per cent same-store-sales growth for ‘front-of-store’ consumer products), the company raised its guidance for the rest of the year.
In 2020, the company plans to redo many of its pharmacy locations as ‘health hubs’, offering both doctors and pharmacists as well as related services on hand, thus driving traffic.
Streaming service should add growth
AT&T’s share price is also constrained because of an acquisition. “People don’t believe that their Time Warner purchase is going to work out,” says Mr. Kim. That said, the analyst is more optimistic. “They have a good shot at it and there are very low expectations.”
The blue chip utilities stock is readying its HBO-based streaming service, HBO Max, which should encourage growth. It has also sold off assets to pay down acquisition-related debt by between US$25 billion and US$30 billion using free cash flow.
Mr. Kim argues that the T-Mobile and Sprint merger could actually help AT&T, since the combined entity would have to divest some of its assets. The merger would also reduce the number of major US telecom players to three, leading to “more rational” pricing and less pressure on margins and revenue.
“Their one Achilles will be DirecTV, which has been slowly losing customers.”
This is an edited version of an article that was originally published for subscribers in the September 6, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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