While drugs and gold were the two most popular forms of payment for votes in the recent election in India, portfolio manager Elvis Picardo proffers far better reasons for picking a pharmaceutical stock and a gold stock as his two current ‘best buys’.
Big gains since the lows of December have kept clients confident, hopeful and invested, observes West Coast portfolio manager Elvis Picardo. “It’s great for us portfolio managers because . . . for the most part, they are happy (to have recovered from their fourth-quarter losses),” he says. Mr. Picardo is a chartered financial analyst and portfolio manager at HollisWealth, a division of Industrial Alliance Securities, in Vancouver.
Both the TSX and S&P 500 recorded their best quarterly performance in a decade and their best first-quarter performance in nearly 20 years during the first three months of 2019 despite middling economic data, he notes. By contrast, 2018 was the worst year for equities globally speaking since 2008.
A “policy pivot” away from hawkish hints of interest rate hikes among central bankers in North America and Europe has driven much of the rally, the analyst says.
China has moved to stabilize its economy
Meanwhile, investor sentiment has leaned toward optimism that international trade and economic issues, such as the trade dispute between China and the United States, will be resolved. China has also moved to stabilize its economy internally, reducing the possibility of a crisis erupting there and spreading elsewhere, Mr. Picardo points out. “These risk factors have been around for a few months but some of them are perhaps in the process of being dialed down,” he says. “The market did not pay much attention to them in the first quarter.”
At present, the greatest visible upcoming market driver is the United Kingdom’s impending (and, as of press time, still-unresolved) departure from the European Union. Mr. Picardo says, “Again, it’s difficult to say what to make of it because the markets have been on a roll.” Whatever shape it ultimately takes (assuming it goes ahead per the British government’s stated intent), the portfolio manager predicts that once Brexit is underway, “The risk would be to the downside.”
Mr. Picardo explains that his team’s strategy in 2019 so far has been to book gains in some of its best performers and allocate the proceeds to stocks that have been lagging the rally in cases where it sees substantial long-term upside.
A healthcare stock and a gold stock are ‘best buys’
Under that criteria, the portfolio manager highlights CVS Health Corp. (NYSE—CVS) and Barrick Gold Corp. (TSX—ABX; NYSE—GOLD) as his ‘best buy’ selections. “Our two picks are a US healthcare giant and a Canadian company that is now the world’s largest gold miner. The common theme for both stocks is they have recently made transformational acquisitions that improve their competitive positioning for the long term,” he says.
Long-term gain worth the short-term pain
CVS is a recent addition to his clients’ portfolios. Mr. Picardo says his firm sold off its position in pharmaceutical stock AstraZeneca (LON—AZN) in favour of CVS shares in mid-March.
“CVS has tremendous reach across the US with its chain of 9,800 retail locations and 1,100 walk-in medical clinics. It also has a leading pharmacy benefits manager with approximately 93 million plan members,” says the analyst.
The analyst notes that CVS share prices suffered recently when competitor Walgreens Boots Alliance (NASDAQ—WBA) lowered its 2019 earnings forecast after its fiscal 2019 second-quarter (period ended Feb. 28) results fell short of analysts’ estimates. In mid-February, CVS reduced its own earnings per share (EPS) estimate for 2019, in large part as a result of its US$70-billion (previously the offer stood at US$69 billion) acquisition of US health insurer Aetna Inc. in November 2018.
Mr. Picardo argues the post-merger entity will be a uniquely integrated retailer, pharmacy benefits manager, and health plan. “Short-term pain is worth long-term gain in our opinion. I think the stock will do well in the long run.”
Although the company has only raised its dividend three times in the last five years, the dividend has jumped 35.6 per cent in the last three years; it currently stands at US$2 per share per year.
If you like gold, buy Barrick
With regards to Barrick, investors should first determine their attitude towards gold as an investment, Mr. Picardo advises.
Barrick Gold consolidated its position as one of the top gold miners in the world following its takeover of Randgold Resources Ltd. at the beginning of 2019. The portfolio manager says that although Barrick is down roughly 40 per cent from a high of about $30 a share in mid-2016, for the bullish, “This industry leader is a suitable low-risk way to play the gold sector.”
Its geographic diversity, long-established position, and healthy balance sheet greatly lessen its risk relative to other precious metals miners, says the analyst.
Barrick offers a small dividend of US$0.07 cents per quarter (up from US$0.03 since 2019’s first dividend payment in January) or US$0.28 per share a year, translating to a roughly 2.1 per cent yield.
(Disclosure: Mr. Picardo holds shares of AstraZeneca and CVS.)
This is an edited version of an article that was originally published for subscribers in the April 26, 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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