Analysts follow as many as 20 stocks, most of which are rated ‘buys’. Of those buys, an analyst has one or two special favourites seen as most suitable for new buying. Portfolio manager Mike Vinokur names a consumer goods stock and a manufacturing stock that he says are the two best stocks to buy now.
Rather than trying to pick the next big sector, Trapeze Asset Management vice-president and portfolio manager Mike Vinokur suggests that investors looking for portfolio additions should search for specific “spots of undervaluation” in the current investing environment.
“Certainly the market seems to be fairly valued at this point, maybe even a little bit overvalued,” he says. “It’s probably more of a stock picker’s market at this point.” The analyst says that overall, he would not recommend any sector wholesale, nor does he have any preference between Canadian and U.S. stocks, at least in general terms. However, asked what areas of the economy he is currently avoiding, he says Canadian stocks strictly tied to mortgages face a rocky road ahead.
New federal rules for mortgage lending went into effect across the country on Oct. 17. All new insured mortgage applications will now subject would-be borrowers to a ‘stress test’ to measure their ability to afford a mortgage even if rates rise. Last February, the government introduced higher minimum down payment requirements.
Mr. Vinokur argues that, because of the changes to regulations, mortgage-focused businesses could feel pressure from lower growth rates, higher capital requirements, and higher default rates.
Conventional retail is another sector that the analyst is wary of. He says: “By and large, retail has a fairly high operating cost.”
Moreover, bricks-and-mortar retail businesses need to compete with Internet-based businesses that can offer many of the same products with far fewer, and lower, fixed costs. Thus, retailers will have difficulty raising their bottom line since general operating costs and possibly labour costs will climb “without revenue necessarily increasing lock-step,” the analyst argues.
Despite his thoughts on the sector in general, Mr. Vinokur still sees a bright future ahead for at least one consumer goods stock and his first ‘best buy’ selection, GameStop Corp. (NYSE—GME).
For love of the games
GameStop is a video game retailer with an international presence. The analyst describes the company as a premier leader in the gaming industry. The company sells all manner of new and used items related to video games, including hardware, software, digital content, consoles and accessories. GameStop operates in the United States, Canada, Australia, New Zealand and Europe.
“They have 7,500 stores across the world,” says Mr. Vinokur. “More importantly, they have completely diversified their branding.”
Firstly, its namesake GameStop locations and EB Games stores are focused on selling games themselves. Secondly, its Simply Mac brand sells strictly Apple products and accessories, true to its name. Thirdly, the company’s ThinkGeek sells paraphernalia related to movies and other entertainment, such as action figures. Finally, the company operates 1,400 wireless kiosks under the Spring Mobile banner that sell cellphones and assorted accessories like cases.
Mr. Vinokur asserts that the future is bright for GameStop thanks to the loyalty of the gaming community both to their habits as well as the chain, in part because they deal in used products.
Promising future growth drivers include new PlayStation, Xbox and Nintendo consoles coming out within the next 12 months, as well as advancing 3-D augmented reality and virtual reality devices.
As for GameStop’s own efforts to go digital, its stated goal is for half of sales to occur online by 2019. “They’re heading in that direction,” says Mr. Vinokur. In the meantime, he adds, the stock trades at just six times earnings, pays a strong dividend that yields six per cent, earns a return on equity of almost 20 per cent, and boasts a low debt-to-equity ratio well under 20 per cent.
Car parts and systems manufacturer travels the world
Mr. Vinokur’s second ‘best buy’ pick is a Canadian stalwart manufacturing stock, Magna International Inc. (TSX—MG; NYSE—MGA). Magna manufactures vehicle parts for automakers on multiple continents.
“What I like about Magna is the fact that they deal with most of the automotive manufacturers in the world,” he says. The company’s “massive moat” in terms of economies of scale and geographic diversity protects it, so whether global car consumption rises, stays flat, or even falls slightly,“Magna can still make very good earnings”.
Like GameStop, Magna currently offers a return on equity close to 20 per cent, while its dividend yields 2.5 per cent.
Looking ahead, the company recently won a BMW contract to produce components for all Series 5 vehicles and added a bolt-on acquisition in Europe. Mr. Vinokur says Magna’s balance sheet can easily handle its dividend obligations as well as more takeovers.
Investor’s Digest of Canada, MPL Communications Inc.
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