Vancouver-based portfolio manager and chartered financial analyst Elvis Picardo takes a look at recent market volatility and finds two stocks, both already giants in their sectors, as the two best stocks to buy now. And despite their size, each has significant growth opportunities.
The recently roiling markets, stirred up by heated trade-related rhetoric, suggest they may have reached a turning point, away from their placid and ever-expanding state in 2017. Investing professional Elvis Picardo says that, accordingly, it pays to be defensive.
Mr. Picardo is a Vancouver-based chartered financial analyst, chartered investment manager, and portfolio manager with HollisWealth, a division of Industrial Alliance Securities. “Market volatility has definitely surged since February, making the solid start to the year in January seem like a distant memory,” he says.
As of early April, the major US indexes were about 10 per cent lower than the record highs set in January. On Monday, April 2, the S&P 500 closed at less than its 200-day moving average of 2,600 for the first time since June 2016, and then repeated the feat on Friday, April 6. Meanwhile, the United States and China have each imposed tariffs on the other’s exports, as well as promised more to come.
Worries that US interest rates will rise have also taken their toll on market sentiment. The analyst adds: “Of course in Canada we still have to worry about the NAFTA renegotiation.” Mr. Picardo points out that these factors all existed before the recent pullback; the difference now is that they have
become part of investors’ decision-making whereas they were largely ignored
Earnings growth will continue
However, he also notes that based on fundamental economic indicators, “Earnings growth in most countries will occur,” including the US. “The consensus is that there are enough tailwinds to keep the markets moving higher from these levels,” he says. In fact, the consensus is for 2018 US corporate earnings to rise 2.5 per cent to three per cent higher than last year.
Summing up, the analyst says: “People are still hoping that this is the start of the negotiating phase rather than a full-blown trade war. If we don’t have a full-blown trade war . . . then hopefully the TSX benefits.” If the cross-Pacific trade conflict escalates, US technology is in a position to lose, which could have farther-reaching effects, he warns. “It’s been one of the leaders in the slow rally over the last nine years.”
Defence is the order of the day
In light of this somewhat uncertain environment, Mr. Picardo goes on defence, selecting a major Canadian utilities stock and a worldwide payment juggernaut that nevertheless boasts strong growth potential, Hydro One Ltd. (TSX—H) and financial stock Visa Inc. (NYSE—V), as his ‘best buys’.
Hydro One is one of the largest electric utilities in North America. The company’s transmission network serves almost all of Ontario, which contains 38 per cent of Canada’s population.
The analyst notes that 99 per cent of its revenue comes from regulated operations. Since it passes on the cost of electricity directly to consumers, Hydro One has very little exposure to commodity prices. At the same time, it boasts an ‘A’ credit rating and has set a target dividend payout ratio of 70 per cent to 80 per cent. The utility’s current quarterly dividend of $0.22 per share translates to a 4.2 per cent yield annually.
Hydro One will take over US utility Avista Corp. in its first major acquisition, expected to close in 2018’s latter half. Avista serves five US states and will increase Hydro One’s assets by about 37 per cent, to $35 billion. Industrial Alliance recommends Hydro One as a ‘buy’ with a $26 target share price for stable business, projected earnings growth through 2021, and a healthy dividend yield.
The company is also building up an unregulated fibre-optic business, which in 2017 contributed $70 million in revenue and $18.5 million in earnings before interest, taxes, depreciation and amortization (EBITDA).
Global juggernaut is seen as a growth stock
Visa is known (sometimes too well) to borrowers as one of the world’s largest electronic payments networks, processing close to US$9 trillion in transactions in 2016. “We began to acquire stock in the low $80s for clients, as of the beginning of 2017,” says Mr. Picardo. The financial stock peaked at more than 50 per cent higher in January, at US$126.88 per share, before retreating slightly. The analyst attributes the recent decline to profit-taking.
Visa has indicated that it will grow fiscal 2018 revenue by seven per cent to nine per cent. The first fiscal quarter numbers (which coincided with the 2017 holiday season) bore out the trend, with operating revenue up nine per cent year-over-year on strong US results. “Despite its size, it’s more of a growth story than a dividend play,” says Mr. Picardo.
“It’s been such a dominant player along with MasterCard. We’re becoming a cashless society. These two companies tend to benefit a lot from this big secular trend.” Perhaps illustrating its room to keep growing on this trend, Visa last split its shares four-for-one in 2015.
(Disclosure: Industrial Alliance Securities is a member of Hydro One’s underwriting syndicate.)
This is an edited version of an article that was originally published for subscribers in the April 27, 2018, 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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