A frequent contributor to Investor’s Digest of Canada, Elvis Picardo is on a roll. His picks for the popular ‘Best Buys’ from Leading Analysts column in December, 2015, and March, 2016, are all up over 20 per cent. This month he goes hunting for bargain stocks south of the border. He finds a financial stock and a healthcare stock in which Canadians might have an added advantage to profit from U.S. stocks.
Looking back on the admirable gains that his stock picks have made since last winter’s doldrums, Vancouver-based Global Securities analyst and portfolio manager Elvis Picardo modestly cites some conventional investing wisdom by way of explanation. “Everyone’s a genius in the bull market,” he says.
When Mr. Picardo last appeared in the ‘best buys’ section of this publication, back on March 11, he singled out SNC-Lavalin Group Inc. (TSX─SNC), Fortinet Inc. (NASDAQ─FTNT) and Innergex Renewable Energy Inc. (TSX─INE) as companies worth investing in.
Revisiting their prices on May 25, he noted that the three companies’ share prices rose 22.1 per cent on average since March 11. By comparison, the TSX as a whole only gained 4.2 per cent over the same period.
Going back even farther, the analyst recommended Xylem Inc. (NYSE─XYL) and Baxalta Inc. (NYSE─BXLT) in our Dec. 25, 2015, issue as ‘best buys’.
Somewhat coincidentally, those two U.S. stocks have made similar gains on a percentage basis, rising by 22 per cent and 21 per cent, respectively, between the issue’s publication and late May.
Flying south for the summer
However, the TSX’s recovery, based on rebounding crude oil and other commodity prices (as well as the loonie’s corresponding rise), has left the analyst searching south of the border for U.S. stocks selling at bargain prices.
“We had a really good rebound off the lows early this year and it’s getting pretty hard to pick stocks in this environment,” he says of Canada. Mr. Picardo notes that early in the year, many market-watchers expected the TSX to outperform the S&P 500, but adds that it has already done so. Since markets have entered the warmer, more volatile part of the year, a more cautious approach is necessary, including stakes in defensive sectors, the analyst says.
Aside from the push factors prompting him to move money, Mr. Picardo also feels a pull stateside, from the greater promise that the U.S. economy currently boasts. “With Canada, there are still some concerns about the strength of the domestic economy.”
The analyst says much of the market expects the U.S. Federal Reserve to raise inter-bank overnight interest rates by July. In Canada, where recovery is slower, low rates will likely stay steady. Assuming the U.S. Federal Reserve raises the federal funds rate and Canada stays the same, the greenback’s value against the loonie could vault upward as well, offering a further opportunity to profit from U.S. stocks. In fact, Mr. Picardo encourages buying stocks that would benefit from U.S. Federal Reserve rate increases “in the next year or two”.
Banking on banking (and medicine)
Bank of America (NYSE─BAC), Mr. Picardo’s first ‘best buy’ for this issue, is not only in a defensive sector, it is a financial stock geared to profit from those rate hikes. “In a rising rate environment, your margins would tend to expand,” explains the analyst. (Banks benefit from larger net interest margins, or the difference between the interest charged to borrowers and the interest the banks themselves must pay, such as to depositors and central banks, he elaborates.)
Mr. Picardo says the market was previously concerned that the Bank of America was vulnerable to bad loans in the energy patch, but as of March 31, it had more than doubled reserves specifically set aside to offset any bad energy loans, to $1 billion.
The massive reserves increase and oil’s seeming recovery mute any concerns about the bank’s ability to stay solvent and attend to all of its obligations. Even a dividend hike is possible, says the analyst.
Meanwhile, U.S. global healthcare stock Abbott Laboratories (NYSE─ABT), his second ‘best buy’, produces pharmaceuticals and medical devices.
Mr. Picardo says the stock has underperformed since unveiling its takeover of medical device firm St. Jude Medical Inc. on April 28, slumping by 10 per cent. “We think it’s a buying opportunity because it’s got a great track record of integrating acquisitions.”
Abbott’s takeover of St. Jude, for US$25 billion and about US$5.7 billion in assumed debt, prompted worries that Abbott’s debt would rise unsustainably. However, the analyst dismisses the idea based on Abbott’s status as a longtime S&P 500 dividend aristocrat and the pharmaceutical industry’s steady cash flow.
He says buying St. Jude Medical, which specializes in cardiovascular devices, will expand Abbott’s device portfolio “substantially”.
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