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. Toronto-based Trapeze Asset Management’s Mike Vinokur names his two current ‘best buys’–both North American based global stocks.
In the coming months, Toronto finance professional Mike Vinokur advises investors to be specific about picking the right spots to invest, rather than simply diving into the larger market despite bullish sentiment.
“I am expecting a pullback at some point. Having said that, while we do expect to see a correction in the near-term and, dare I say a volatile, up-and-down year, I still believe there will be upside to the market in general.” Mr. Vinokur is a vice-president and portfolio manager at Trapeze Asset Management. “We are pushing up against P/E (price-to-earnings) ratios that typically signal some kind of a fair valuation.”
Nevertheless, his first ‘best buy’, Magna International Inc. (TSX—MG; NYSE—MGA), trades very cheaply at just eight times this year’s estimated earnings and seven times next year’s forecast. Magna is the premier automotive parts manufacturing stock in the world with a footprint on four continents. It also enjoys current net debt of a little less than $3 billion and debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 0.7, which Mr. Vinokur says is very good for a large industrial firm.
Looking to the future of this Canadian-based global manufacturing stock, the analyst explains that much of his optimistic outlook is because “Magna is getting really big into the infotainment space. Magna’s roots are still in the traditional auto parts manufacturing with the hardware component but I think that they will make a huge push in that space going forward.”
Auto parts manufacturer will be more like a technology stock
Specifically, the company plans to move towards producing the hardware and software in user interfaces linking a vehicle’s occupants to entertainment, information, comfort control and other systems. “Up until now, we’ve had cars with computers, but in the future, literally we’re going to be driving computers on wheels,” says Mr. Vinokur. He adds that the company enjoys considerable growth prospects but its downside is limited because of its cheap price and healthy dividend yield.
The analyst’s second ‘best buy’ pick is also a stalwart in its field, U.S.-based global technology stock Apple Inc. (NASDAQ—AAPL). “Part of the value proposition with Apple and companies like Apple is the belief that president-elect Donald Trump will ring through on his platform” and call on large companies to return their cash abroad to the U.S. at a low one-time tax rate, he explains. Such a one-time rate would create an incentive for big share repurchases, especially since Apple holds about US$30 in net cash per share.
Although the company’s growth rate has slowed, this tech stock is still expected to earn $9-to-$10USD per share in 2017. Some may have concerns about its ability to keep increasing iPhone sales, but, Mr. Vinokur says: “Apple is not a one-trick pony by any stretch of the imagination.”
He points to its diverse set of businesses and products aside from iPhones, including the iCloud data storage service, Macintosh computers, iTunes, Apple Pay, and forays into products as diverse as driverless vehicle and its potential interest in building gear for data centres, which should also contribute to growth.
Watch oil and gas stocks, financial stocks and REITs
Aside from his two ‘best buys’, three appealing sectors that could face a pullback ahead are energy stocks, financial stocks, and real estate investment trusts (REITs), he says. Until just a few years ago, oil and gas production in the U.S. and Canada tended to be much more expensive and inefficient than production in other countries. However, Canadian and American energy stocks have adapted to lower commodity prices with technological upgrades that cut well drilling and completion costs to the point that oil priced as low as about US$55 per barrel is “starting to become fairly profitable”, according to Mr. Vinokur.
Meanwhile, U.S. president Donald Trump’s promises to cut down government regulation and lower taxes bode well for financial stocks as a whole and insurance firms in particular. “The insurance industry benefits quite tremendously with interest rates rising. You still have many insurance companies in the U.S. that are trading below book,” says Mr. Vinokur.
Although insurance company stocks have lost favour in a climate of low interest and concerns about the segment’s soundness, they have largely repaired balance sheets and hedged the downside risks of their managed portfolios, such as interest rate changes and bond and equity market fluctuations, the analyst says. Thanks to their very high capital levels and low P/E ratios, Mr. Vinokur adds: “Competitive pressures, I don’t believe, are a threat to existence.”
Similarly, the analyst remains a fan of REITs, even though they too were hurt by low interest rates. Accentuating the positive, he points out that many are well-run companies available through the primary capital markets, and boast geographic diversity. REITs have already bounced back between six per cent and 10 per cent from recent lows, he notes. “Today, they’re not as cheap as they were two months ago, but I think that sector sometimes gets a bad rap for being so interest-rate sensitive.”
This is an edited version of an article that was originally published for subscribers in the January 27, 2017, 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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