Are infrastructure and healthcare an odd couple?

An infrastructure stock and a healthcare stock sound like an odd couple for investment counsellor Robert Sneddon’s two ‘best buy’ stock selections. But Mr. Sneddon forecasts a strong bull run that investors will enthusiastically chase following the imminent correction. In that context, he says, infrastructure and healthcare are two promising areas for investment.

Prevailing investment wisdom holds that diversification is the best defence against risk, lest all our proverbial eggs be smashed in their sole basket. However, Robert Sneddon says that his investment counselling and portfolio management firm, CastleMoore Inc., has a different attitude. “We don’t believe in diversification . . . we believe in focusing in sectors where things are working.”

Mr. Sneddon is president, founder, and chief portfolio manager at CastleMoore. In the heyday of the turn-of-the-millennium tech bubble, he formed and tested a long-term thesis arguing that there would be “16 to 18 years of crazy markets”, one in which simply buying and holding stocks would not yield success.

“We started the firm with an eye towards absolute performance, rather than relative,” he explains. “We try to get (our clients) away from watching the TSX as a benchmark.”

The portfolio manager describes CastleMoore’s approach as risk-averse yet mercenary. He and his colleagues scour the market for quality sectors and individual companies based on fundamental analysis with the intent of holding them long-term.

However, they are eager to change course and either shed stocks or buy more shares depending on technical and seasonality analysis indicators. “There’s always things to buy and if we get offside with something, we can sell,” Mr. Sneddon says. Thanks to this approach, CastleMoore converted client portfolios to 100 per cent cash months before the severe correction of late 2008.

Losses play the greatest role in overall returns

Mitigating risk is essential in this investing climate since losses will play the greatest role in determining overall returns, especially after recent rallies, he asserts. “There’s minefields everywhere.”

For example, in the next couple of months, Mr. Sneddon says, “There’s a lot of stuff, geopolitically, that’s ready to cause the market to pause, but we think that’s an opportunity.”

Among the potential correction catalysts he sees ahead are elections in France, the Netherlands, possibly Greece, and constitutional issues in Italy. The 2017 meeting of China’s National People’s Congress (the country’s nominal legislature), which began earlier this month, could also affect markets if China announces lower gross domestic product estimates during the session.

Thus, CastleMoore forecasts overall returns of five per cent or less for the rest of 2017.

A correction, a strong bull run, then a larger correction

Mr. Sneddon forecasts a strong bull run that investors will enthusiastically chase following the imminent correction. In this context, infrastructure and healthcare are two promising areas of investment.

Although he also predicts that the rally that follows the upcoming short recession will give way to an even larger correction in the general market (which he asserts will end the secular bull market in place since the 2008 crash), the analyst argues that the aforementioned sectors have a bullish outlook.

In fact, Mr. Sneddon’s first ‘best buy’ selection, infrastructure stock SNC-Lavalin Group Inc. (TSX—SNC), has benefited little from the post-2008 secular bull run. “They’ve gone through sort of a sideways period more or less for the last seven or eight years,” he says.

The industrial engineering and construction stock reached a high of roughly $60 a share, but then languished under the weight of corruption scandals. The analyst says that if SNC’s share price breaks out past $60 on a quarterly or monthly basis then it could quickly climb. “They’re on the verge of doing that right now from a technical perspective,” he adds.

Widespread expectations for heavy infrastructure investment should encourage price gains long-term, although the sector will likely experience volatility as governments reveal the exact shape of their plans.

In terms of the company itself, he highlights its mix of business lines, which includes resources, government contracts, and architecture. “There’s multiple silos . . . in a business like SNC.”

He also praises the reward-to-risk prospects for the company at current trading levels.

His second ‘best buy’, healthcare stock C.R. Bard Inc. (NYSE—BCR), is a medical device manufacturer.

It offers a variety of infection-control products that hospitals need to improve patient outcomes. More than 85 per cent of revenue comes from high-margin, repeat consumables sales, and organic sales grew seven per cent last quarter.

Mr. Sneddon notes that during the U.S. election campaign, both major presidential candidates often criticized the healthcare industry, stoking fears of unfavourable reforms and new regulations. “Healthcare [stocks] got really pounded down.”

That means the healthcare sector offers good short-term investment opportunity as it corrects, and perhaps an even better one if investors can hold on longer, he says.

 

This is an edited version of an article that was originally published for subscribers in the March 24, 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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