Sentry Investments executive Andy Nasr looks to the United States, especially the financial, consumer staples, healthcare, technology, construction and infrastructure sectors, as good places to invest now. When pressed to be more specific, he names a consumer packaged goods stock and a healthcare diagnostics and research stock as his two favourite ‘best buys’.
For all the gains in the market since last autumn, portfolio manager Andy Nasr says there is relatively little risk that Canada’s economy will decline into recession soon, at least not before trouble south of the border. “We’ve never had a recession in Canada while the U.S. is still growing at two per cent,” he notes. Mr. Nasr is an investment strategist and vice-president of capital markets at Sentry Investments.
U.S. stocks better positioned for further gains
Looking at the short term economic picture, he notes: “We’ve had a good first-quarter reporting season.” He predicts that earnings will dictate stock returns for the next couple of quarters. Due to the promise of housing starts in the United States, high consumer and business confidence, and rising interest rates, stocks there enjoy better potential for gains than in Canada.
Mr. Nasr says that generally speaking, he expects modest total returns stateside, in the mid-single-digit percentages, including share price increases and dividends. However, if the Republican federal government introduces fiscal reform, such as a raft of tax cuts, “You could see a pretty significant upside,” he says. The analyst adds: “It looks like global growth is accelerating slightly but, fingers crossed, that will remain the case for the rest of the year,” he says.
Asked about the domestic outlook, Mr. Nasr replies that he is “generally constructive” on the Canadian market, although he expresses some concern over the housing sector and significant residential real estate price increases in major metropolitan areas.
On one hand, a widespread mortgage default or even difficulty comfortably servicing mortgages would “definitely” dampen consumption and discretionary spending, the analyst asserts, but on the other, the greater access to credit that accompanied rising real estate prices has fuelled economic activity. Fortunately, such mortgage-related problems would only erupt if unemployment or interest rates spike.
As for domestic growth, he says: “The biggest wild card with Canada remains obviously the energy sector.” If it grows or shrinks, the rest of the economy will ride along, creating uncertainty. For these reasons, the analyst prefers U.S. financial stocks over Canadian bank stocks, which he says Sentry has significantly underweighted. U.S. financial stocks enjoy better return on equity than Canadian bank stocks and there are widespread expectations of higher interest rates and profits ahead for the sector, he says.
Consumer goods and healthcare stocks are favoured ‘buys’
U.S. consumer staple stocks are another promising sector, along with REITs, healthcare stocks, technology stocks, and construction and infrastructure, he adds. Mr. Nasr’s ‘best buy’ selections, Newell Brands Inc. (NYSE—NWL) and Laboratory Corp. of America Holdings (NYSE—LH), are tied to consumer spending and health care, respectively.
Sentry Investments’ ‘house style’ is to select companies with healthy balance sheets and substantial free cash flow (FCF) as well, especially emphasizing productive returns on invested capital over time, the analyst explains. “Ideally what we want . . . are companies that have strong defensive business models that have what we call economic moats.”
The analyst says his best advice to investors at present is to be defensive through diversification, by asset class, geographic region, and specific company. In many cases, Sentry chooses firms in oligopolies or duopolies, so their market share is very stable and they should deliver stable earnings growth over time.
Best buy among consumer stocks
Newell Brands is a highly diversified consumer packaged goods stock. Among its many products are household appliances such as coffee makers, pens, fishing gear, class rings, and baseballs. Some of its brands include Rawlings, Sharpie, Paper-Mate, Rubbermaid and Sunbeam. The company dominates in most of the business segments in which it operates. Also, because its products are relatively unique, they have suffered fewer losses in brick-and-mortar store sales.
Mr. Nasr says that as U.S. real estate heats up, there will be more property owners and renters setting up new homes, which will increase Newell’s sales. Newell intends to increase online sales from about five per cent of the total to 20 per cent within five years. Some of its product revenue may decline in a recession, but others will remain in heavy rotation, says Mr. Nasr.
Drug testing drives this top U.S. healthcare stock
Meanwhile, the clinical laboratory network commonly known as LabCorp, “is a bit of an outsourcing play”. Drug makers are contracting out research to other companies to save on expensive testing costs and more quickly market new products. LabCorp provides drug diagnostics and clinical testing. Mr. Nasr notes that 45 per cent of pharma firms already outsource.
The growing ranks of seniors in the population should further bolster medical research as a business. The company already has a deeply impressive moat. The analyst forecasts US$1.2 billion in FCF for 2018. “On a US$14-billion market cap, that’s quite significant.” He says the company’s valuation is similar to its peers but it should deliver better sales growth and FCF growth.
This is an edited version of an article that was originally published for subscribers in the May 12, 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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Investor's Digest of Canada •5/15/17 •