PI Financial’s Guy Lapierre picks two Canadian pipeline stocks to buy. Their pipelines are full and one has a new polypropylene plant coming on line.
Although Vancouver-area financial professional Guy Lapierre likens the global economy at present to a precarious stack of Jenga blocks, he is also sure to point out “there are still opportunities in any given market”.
Mr. Lapierre is a vice-president as well as a portfolio manager and branch manager at PI Financial in British Columbia. The portfolio manager notes that trade issues continue to hamper market growth. “Trade is lethal.” Even so, invoking his Jenga metaphor, he argues that interest rate changes (or a lack thereof) could hurt stock prices even more. Comments from some US Federal Reserve Board members have not only raised the possibility of keeping interest rates as they are, but also suggested there could be as many as two rate cuts between now and the end of 2019, rather than one increase as suggested previously.
“The chair is quite clear that they’re going to follow the economics,” explains Mr. Lapierre, so rate hikes are far from a certainty. If they do occur, the market would not be able to smoothly absorb the news, he says. “That’s the block that drops the whole tower. It pretty much makes a correction in the fall highly likely.”
Portfolio realignment nearly complete
When Investor’s Digest last interviewed Mr. Lapierre in February, he noted that he was moving his clients toward a default mix of 50 per cent fixed-income investments and 50 per cent equities in their portfolios, along with a portion of cash within the 50 per cent allotted to equities. He says the move is generally complete, with some clients holding less than 30 per cent equities in their portfolios at present.
Despite his wariness of the market in general, he is still adding some stocks at a modest rate to his clients’ holdings.
Remarking on recent trades, the portfolio manager says he missed out on the May 3 initial public offering of Beyond Meat Inc. (NASDAQ—BYND) but nevertheless was able to pick up shares, sell them after a quick rise, and then buy more shares after the price dropped again.
“I think we’re on our third run of that. We see that as a narrow position in a unique circumstance.”
Intel’s everywhere—in my toaster, my computer, my fridge
Other companies that Mr. Lapierre says he is constructive on include Brookfield Asset Management Inc. (TSX—BAM.A; NYSE—BAM) and semiconductor manufacturer Intel Corp. (NASDAQ—INTC).
Of Brookfield, he says simply: “That’s literally to soak up cash.” Brookfield’s quarterly dividend currently stands at US$0.16 a share.
As for Intel, the portfolio manager notes that computer chip makers suffered when the Chinese government ordered Apple Inc. to settle a dispute with Qualcomm Inc. to ensure access to the chips used in iPhones.
Mr. Lapierre says he favours Intel over Qualcomm and Nvidia Corp. because the latter two companies serve overly specific niches (mobile devices and video cards, respectively) that are likely to be battered if the China-US trade dispute ramps up further.
“In contrast, Intel is everywhere. It’s in my toaster, it’s in my computer, it’s in my fridge,” he says.
Pembina’s pipes full of what the market demands
Attesting to the portfolio manager’s contrarian nature, his ‘best buy’ recommendations are two Canadian pipeline stocks—recently an oft-derided portion of the market—Pembina Pipeline Corp. (TSX—PPL; NYSE—PBA) and Inter Pipeline Ltd. (TSX—IPL).
The portfolio manager says: “We’re not looking for Pembina to surprise. It’s just that its pipeline is full.”
He praises the company’s stable, secure 20-year contracts and income-oriented nature. Pembina’s dividend currently stands at $2.40 per share annually, translating to a 4.9 per cent yield.
“In the British Columbia market, there’s a general opposition to pipelines,” Mr. Lapierre observes. Thanks to the company’s lengthy contracts, government policies will do little to dampen operations. He notes that demand is set for the substances Pembina delivers even if prices change due to overall supply.
Polypropylene plant adds high-value product
Inter Pipeline yields a remarkably high 8.4 per cent at the moment. “There’s questions about whether they can sustain that dividend yield,” admits Mr. Lapierre. Otherwise, the company has a similar profile to Pembina. However, as Mr. Lapierre emphasizes, a key reason for the difference is Inter Pipeline’s debt.
The company opted to invest $3.5 billion (for comparison, its market capitalization is just $8 billion) to build a polypropylene plant in Parkland, Alta. Polypropylene, a common household plastic, is used in everything from milk jugs to bumpers, it travels by train (not pipeline), and is a higher-value product than raw petrochemicals.
Mr. Lapierre predicts that the stock price will rise as the plant moves closer toward production. He also praises Inter’s management for its vision to diversify as a business.
This is an edited version of an article that was originally published for subscribers in the June 21, 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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