“Our bank pick is trading at valuations that are compelling enough to justify buying it at present prices. Our pipeline pick is a hedge of sorts against lower bond yields,” he explains.
Vancouver-based portfolio manager Elvis Picardo, of HollisWealth, a division of Industrial Alliance Securities, asserts that a hot but unsteady market warrants greater care from investors, especially as the seasonally shakiest part of the year approaches. “We’ve had North American indices at all-time highs very recently,” he says, noting that year-to-date gains as of mid-July ranged between 15 per cent and 20 per cent.
At the same time, the market has suffered from two bouts of volatility in the past few months (in December and May), Mr. Picardo observes. In the most recent period of instability, the major US indexes fell by an average of roughly seven per cent, while the TSX lost more than three per cent of its value. “We think it’s prudent to take some money off the table and adopt a more defensive stance,” says Mr. Picardo. The market quickly rebounded in June, largely due to the US Federal Reserve’s hinting of interest cuts.
The portfolio manager says: “While the resultant decline in US bond yields and anticipation of imminent US rate cuts have provided a tailwind to equities, we are in the camp of market participants who view the diverging signals being given by the equity and bond markets with some concern.” Negative-yielding debt has reached US$13 trillion worldwide, with yields below zero in major economies such as Germany and Japan, he points out. Lasting for years, low yields have caused large distortions in financial markets, creating certain risks and opportunities, Mr. Picardo says.
Analyst chooses a bank and a pipeline
The portfolio manager names financial stock Wells Fargo & Co. (NYSE—WFC) and oil and gas stock Pembina Pipeline Corp. (TSX—PPL; NYSE—PBA) as his ‘best buy’ selections under the current circumstances. “Our bank pick is trading at valuations that are compelling enough to justify buying it at present prices. Our pipeline pick is a hedge of sorts against lower bond yields,” he explains. Wells Fargo’s share price is near a 5.5-year low, while Pembina has risen 20 per cent year-to-date (riding on Canadian pipeline companies’ positive correlation with low bond yields).
Remarking on the broader market, Mr. Picardo advises staying away from the major technology stocks responsible for the bulk of North American equity growth in recent years, such as Amazon.com Inc. and Apple Inc. He suggests their rapid expansion has resulted in companies “too big to succeed” that are ripe for future government regulation. “These companies are so large and they have so much clout, there could be change coming down the line.”
Mr. Picardo also says, “As we’re near record highs, it’s not the right time to be in something that tracks the broad market,” such as broad index ETFs. He suggests taking a more specific, agile approach instead. As for other opportunities related to low interest rates and yields, utilities and other defensive stocks are starting to receive more investor attention due to their relatively healthy yields compared to bonds, the portfolio manager says.
Meanwhile, unresolved issues such as the US-China trade war and the United Kingdom’s departure from the European Union continue to weigh on future share price movements. “You also have global economic data that’s getting quite tepid,” Mr. Picardo adds, especially signs of an earnings slowdown in the United States. Given these factors, it is difficult to imagine markets coming even close to matching their 2019 first-half performance in the second, he says.
Wells Fargo scandals have receded
Wells Fargo is among the world’s largest banks, serving 70 million customers and one in three US households. Focused on domestic operations, it is the top US bank in terms of retail deposits, residential mortgage origination, commercial real estate, and small business lending. A fake account scandal in 2016, other scandals, and the consequent departure of two CEOs have hammered Wells Fargo stock in relation to its peers.
However, operations “seem like they’re turning a corner” and the naming of a new chief would rid the bank of a major overhang on price, says Mr. Picardo. In addition, Wells Fargo plans to buy back up to US$23 billion of stock over the next four quarters.
Pembina has strong growth prospects
Pembina is a diversified energy infrastructure company. It operates an integrated system of pipelines, gas gathering and operating facilities, and other natural gas liquids (NGL) and oil-related assets. The company has a solid presence in the Western Canadian Sedimentary Basin as well as US shale-producing areas.
For the last 10 years, Pembina has returned an average of 18 per cent annually through share price gains and dividends. “Pembina has increased its dividend four per cent annually and has never had to cut it (over the same period),” the portfolio manager says.
It boasts strong growth prospects as well. The company commissioned major projects worth $1 billion in the year preceding its May 14 investor day, and intends to finish another $700 million of growth projects before 2019’s end.
(Disclosure: Mr. Picardo holds shares of Pembina.)
This is an edited version of an article that was originally published for subscribers in the August 9, 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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Investor's Digest of Canada •10/8/19 •