Dominant global technology stock Alphabet Inc. (parent of Google) and renewable energy stock Algonquin Power and Utilities are the two best stocks to buy now says Toronto-based Sentry Investments analyst Andy Nasr. Sectoral rotation has recently weakened their trading price ranges.
Optimism is building for what 2017, the U.S. Federal Reserve, and soon-to-be U.S. president Donald Trump will bring to the economy, although markets have run up ahead of themselves prematurely in their excitement, according to Andy Nasr of Sentry Investments.
Mr. Nasr is an investment strategist and vice-president, capital markets at Sentry’s office in Toronto. He says the market appears to be pricing in a Fed interest rate hike as well as hope for business-friendly policies under Mr. Trump’s administration.
However, he says: “I don’t think that much should change in the next few months. I think the markets moved up a little too quick. Sector rotation has happened a lot.”
Overall GDP growth for 2017 should be modest
For his part, the investment strategist is taking a cautious approach until there is a better picture of what policies lie ahead. He projects relatively low overall GDP growth of two per cent in 2017, the same figure he used prior to the recent rally.
“We expect modest upside. The reality is you may end up with GDP growth higher than that (but) given that we don’t have a lot of visibility . . . it’s really premature to change our growth baselines before we get that clarity.”
Combining dividend yields with growth in the low-to-middle single-digit percentages, total 2017 returns will likely range between five per cent and 10 per cent, Mr. Nasr predicts. The analyst adds that he expects similar trends in the United States and Canada.
The aftermath of the failed Italian referendum on Dec. 4, which the ‘yes’ side hoped would secure approval to reform the country’s legislature, is also playing a role in current market movements, Mr. Nasr suggests. “The thing we were worried about most was the Italian referendum,” he said Dec. 5.
Plans to privately recapitalize Italy’s third-largest bank, the troubled Banca Monte dei Paschi di Siena, appear to have fallen apart due to would-be investors’ concerns about political stability. “I think the market’s higher because people think the European Central Bank will be forced to step in, in some capacity,” says Mr. Nasr.
Asked about Sentry’s own sector rotations, the analyst says its portfolio is currently overweight in sectors such as financial stocks. Healthcare stocks and technology stocks are also promising, he adds.
Dominant global technology stock is first ‘best buy’
In fact, Mr. Nasr argues that the trading price of his first ‘best buy’, Alphabet Inc. (NASDAQ—GOOG), has weakened lately because many institutional investors have sold off technology stocks to add to positions in more cyclical sectors, such as infrastructure and financial stocks, in anticipation of economic growth. This has resulted in a great valuation for Alphabet, especially considering its dominant position. Alphabet is the giant that owns Google. Its business is made up of two segments, the online search engine and mobile advertising that made it famous, and cloud computing.
Google and Facebook currently account for about 50 per cent of online advertising. Market research company eMarketer projects a 30 per cent yearly increase in digital advertising spending through 2020. “That’s something that’s still in the early stages of growth,” says Mr. Nasr. Mobile digital marketing should grow even faster, especially as users increasingly adopt smart-phones worldwide and ‘television’ media consumption increasingly moves online, he adds. Alphabet subsidiaries such as YouTube further contribute to online advertising revenue.
Meanwhile, the investment strategist says of the cloud computing segment: “It is also growing, hand over fist.” Alphabet, Microsoft, and Amazon together already serve about 45 per cent of the cloud computing market. However, Mr. Nasr notes that 60 per cent of business computing remains on premises. “There’s still going to be this big outsourcing initiative,” he predicts.
Renewable energy stock AQN now on NYSE
The analyst’s second ‘best buy’, utility stock Algonquin Power & Utilities Corp. (TSX—AQN; NYSE—AQN), also boasts healthy growth prospects and a trading price that fell due to concerns about electricity rate hikes and waning interest in renewable energy with Mr. Trump in charge.
The independent power producer acquires, owns, and operates renewable power projects (hydroelectric, wind, thermal and solar), natural-gas power generation facilities, and utility distribution assets. Mr. Nasr says the company offers investors leverage to good, underlying general economic growth in the U.S.
Early this year, the company announced a merger with the Empire District Electric Co., greatly increasing its U.S. presence and regulated power holdings. Mr. Nasr asserts that the Empire acquisition and Algonquin’s new listing on the New York Stock Exchange will raise its growth profile and attract investor attention.
The analyst also remains bullish about Algonquin’s multibillion-dollar green power project portfolio, noting: “It was really a state-driven push to grow renewable energy generation.”
(Disclosure: Both Algonquin and Alphabet are part of Sentry Investments’ portfolio.)
Investor’s Digest of Canada, MPL Communications Inc.
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