Vancouver-based Elvis Picardo, a financial analyst and portfolio manager at HollisWealth, a division of Industrial Alliance Securities, picks one of Canada’s largest insurers and a US communications giant as the two best stocks for current buying.
While the markets have warmed up since last winter’s volatility, Vancouver financial analyst and portfolio manager Elvis Picardo points out that more trouble may be coming. “We last spoke in April and markets have taken a turn for the better since then,” says Mr. Picardo of HollisWealth, a division of Industrial Alliance Securities.
He had expressed concern then that North American Free Trade Agreement negotiations as well as the then-emerging trade war between the United States and China would dampen bullishness.
Instead, the S&P/TSX Composite Index reached a new high in mid-July. In the second quarter, it gained 5.9 per cent, its best quarterly performance in 4.5 years. The S&P 500 also traded at a six-month high in July and is up more than five per cent year-to-date.
The analyst says that south of the border, US corporate earnings helped to keep the price of shares up; north of it, a weaker Canadian dollar, along with strong commodity prices, especially for crude oil, bolstered the performance of the domestic stock market.
However, he adds: “In recent years, we’ve seen the biggest pullbacks in the months of August and September. We think it may be worthwhile to get a little defensive in terms of portfolio positioning.
“Our two picks are one of Canada’s largest insurers and a US communications giant,” says Mr. Picardo of his latest ‘best buys’, Manulife Financial Corp. (TSX—MFC; NYSE—MFC) and Verizon Inc. (NYSE—VZ).
Considerable potential for capital gains
Financial stock Manulife is a core holding in his clients’ portfolios, the analyst says. As of August, its shares were down by about 10 per cent year-to-date and 15 per cent compared to a nine-year high price of $27.77 per share in late January, making the current price an attractive one to buy at, he argues. He praises the international insurance company’s diversified business, growth drivers, and rising dividends.
The international insurance company reported core earnings of $1.3 billion in the first quarter of 2018, 22 per cent more than in the same period of 2017. Of those core earnings, Asian and US operations contributed 31 per cent each, Canadian operations made up 21 per cent, and Manulife’s global wealth and asset management arm generated the remaining 17 per cent.
“Household wealth in Asia is expected to double by 2025,” Mr. Picardo notes, while the aging North American population translates to a large inter-generational transfer of wealth in the years to come. Manulife predicts these trends will boost demand for its asset management, insurance, and retirement products.
Manulife management describes Asia and its wealth management segment as its long-term growth drivers. Core earnings in each segment rose 21 per cent and 24 per cent year-over-year, respectively, in the first three months of 2018.
The company also boasts one-year dividend growth of nine per cent and cumulative three-year dividend growth of 33 per cent, currently yielding 3.8 per cent.
Even so, the market has not embraced the company. Mr. Picardo explains “it’s been a slow and steady climb” since the global financial crisis and the recovery that followed.
Low interest rates, write-down risks from its legacy business, volatility in long-term bond yields, and a dearth of share buybacks have constrained its and other insurers’ shares.
On the upside, this has kept valuations attractive. Mr. Picardo says the consensus sets an average target share price of $29.12, implying considerable potential for capital gains.
Tech stock giant rolling out 5G
Verizon is one of the largest communication technology companies in the world. A major US wireless carrier, it is also a leader in 5G infrastructure, says Mr. Picardo, who began adding it to clients’ portfolios last October.
The company will launch 5G wireless data service in four markets in the second half of this year. The higher Internet speeds that the new technology enables will support the development of virtual reality, driver-less cars, and the Internet of Things, which should spur further 5G adoption, the analyst asserts.
Financially speaking, Verizon reported that its average revenue per user account rose for the first time in four years in 2018’s second quarter. Longtime pricing wars with competitors and the multibillion-dollar development of its 5G network ate into both the top and bottom lines.
Mr. Picardo says the company has stayed away from mergers and acquisitions even as competitors, such as AT&T Inc. and Time Warner Inc., have joined forces, but adds it may soon be searching for consolidation opportunities. “I think it’s kind of biding its time which kind of makes sense because valuations are very high right now.” The consensus assigns a US$56.5 target share price to Verizon. At present its dividend yield is about 4.5 per cent.
(Disclosure: Mr. Picardo holds shares of Manulife.)
This is an edited version of an article that was originally published for subscribers in the August 24, 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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Investor's Digest of Canada •9/4/18 •