Keith Richards, portfolio manager of Barrie, Ont.-based ValueTrend Wealth Management says his favorite market indicators are flashing ‘buy’ signals in five market sectors. He names his favorite stock picks in each sector: financial stocks, tech stocks, telecoms, consumer goods stocks and oil and gas pipeline stocks.
As many of you know, I write regularly for the Investor’s Digest of Canada, and I always try to talk about some of the investment ideas we’re considering here at ValueTrend.
We follow a top-down investment strategy. So, before looking at individual stocks and sectors, we always use specific indicators to get a sense of the bigger market outlook. These indicators show whether the economic tides are with the market, or against it.
On Sept. 30, I noted that those macro market indicators were flashing a “buy” signal and that investors who’d followed my advice and who’d held cash over the summer now had some great buying opportunities in front of them.
My analysis proved correct. Sept. 30 proved to be the bottom of the 2015 correction. But not being content at ValueTrend to talk the talk, we walked the walk, shoveling most of the cash we’d held over the summer into our stock portfolios.
We began buying in earnest within two days. More importantly, we were able to pick up cheap stocks, some of which had been sold earlier in the year at higher prices.
The cash we held over the summer was our goalie, protecting us against almost every loss that occurred over the summer. And now the goalie has stepped out of the net to play offence, hoping to score some goals.
Market outlook meeting some technical resistance
As I write these words, the S&P 500 Index is having a bit of trouble breaking through a ceiling of around 2130. That ceiling, which analysts call “technical resistance,” has been there since the start of 2015. But it’s also my belief that the index will eventually blow through that substantial overhead barrier.
Now, however, after such a significant ride from its double-bottom low of September, it’s time for the market to pause. And with that pause will come a new opportunity to review and possibly buy high-quality stocks.
I think that any short-term stagnation in stock prices will be followed by a new level of sector rotation as the market struggles to break through its ceiling.
Keep in mind that current conditions call for active market trading, as well as both sector and stock rotation. This is crucial to remember, considering the investment industry’s relentless proselytizing about the necessity of staying fully invested and the so-called “dangers” of portfolio turnover.
As you know, I’ve never accepted these axioms. A blanket buy-and-hold-at-all-costs mentality is actually both riskier and costlier than a carefully planned system of buying and selling assets in volatile times. That’s because today’s leading stocks can easily — and, often do become — tomorrow’s also-rans.
So, with this in mind, here are some of the sectors in which we’re now invested at ValueTrend.
(In upcoming issues of Investor’s Digest, I’ll keep you abreast of what we might be looking at as the market outlook calls for the next rotational cycle).
In the Canadian column, we’re now overweight in yield plays, such as banks, telecoms and energy transportation firms, although not in energy outfits themselves.
BMO is our pick among Canadian financial stocks
In banking, for example, we own the Bank of Montreal (TSX─BMO), one of Canada’s premier financial stocks. Canadian bank stocks in general have been an excellent trade over the past two years.
But having ridden the sector up in 2014, we sold all our Canadian bank stocks in January — a move that made sense, given the subsequent downtrend in the market. Yet that downtrend for the big banks has now ended. So, we’re now back in, riding the breakout.
Nonetheless, our purchase of BMO stock in early October around $75 a share was purely opportunistic. We’re unlikely to hold it for more than a few months. To be sure, BMO generates a more predictable amount of profit from its U.S. segment than other big banks in Canada.
And with the U.S. economy now coming back to life, the Bank of Montreal should benefit from stronger loan growth.
In addition, because it’s highly likely that U.S. interest rates will rise this year or next, BMO’s profit margins should go up as well. Moreover, while waiting for this to happen, investors can collect a dividend with a 4.2 per cent yield.
Among Canadian telecom stocks, our favorite is BCE
Now, over to telecoms where our favorite name is BCE Inc. (TSX─BCE). Although Ma Bell had been trading in a sideways range from $52 to $56 since early this year, its strong breakout in early October was all the reason we needed to snap it up at $56.
Recently, in a typical neckline breakout, BCE pulled back to just above our buy point, giving those investors who missed the boat in October a chance to buy its shares.
Not only is Ma Bell a household name, but it boasts a diversified business model that should continue to benefit from the regulated environment in which most of the company’s divisions operate.
In the meantime, BCE’s wireless business has rolled up a decent rate of growth — a growth rate we expect will continue. And although BCE’s media division has had its challenges, the cash flow for its wireline business is still significant and predictable.
In the meantime, the company should benefit from some of the recent investments it has made. So, we may hold Ma Bell for a while.
Among oil and gas stocks, buy this transporter
We said earlier that we like energy transportation. There, our pick is Keyera Corp. (TSX─KEY), a Calgary-based operator of oil and gas pipelines. Because Canada’s pipeline sector is now oversold, we think Keyera might bounce back over the winter to its $50-a-share highs.
Among U.S. stocks, we’re now overweight in tech stocks, consumer discretionary stocks and bank stocks.
For example, we own BB&T Corp. (NYSE─BBT), one of the biggest financial services holding companies in the U.S. We bought BB&T around $35 a share and we look to sell it at $41 for a fairly quick profit.
Among tech stocks, Intel is our top pick
In the high tech stocks sector, we own Intel Corp. (NASDAQ─INTC), one of the world’s biggest makers of semiconductors, which we bought in early October at $31, as it broke out of its downtrend.
Intel has evolved to where it’s not as dependent as it once was on the personal computer market. In fact, the company has shown it can innovate in new areas. After all, the company’s growing strength in servers and cloud computing has little to do with consumer spending.
In other words, Intel should do well as more businesses buy more powerful servers. All told, the company is a more diversified tech play, one that not only quickly recognizes changing trends, but adapts to them as well. These qualities make us confident that Intel will remain at the cutting edge of technology.
Of course, because tech stocks tend to be strong until the New Year, we monitor our holdings for possible rotation from January onward.
Disney leads the consumer goods stocks sector
In the U.S. consumer discretionary sector, we own The Walt Disney Co. (NYSE─DIS). What can I say about this entertainment behemoth that hasn’t already been said, other than Disney is magic.
Not only have we held Disney for almost two years, but we’ve never regretted our decision to buy.
In fact, the company’s upcoming plan to capitalize on Star Wars makes it one of the few stocks we feel comfortable holding for the long term.
Of course, in talking about all these sectors, it’s absolutely vital to keep one thing in mind. Sectors will change. Although certain sectors may stay positive and even outperform other sectors for a time, they won’t stay that way forever.
Inevitably, it will be necessary to rotate out of them into new, up- and-coming market leaders.
So, if you want lower volatility, but superior portfolio performance, forget buy and hold as an investment strategy option. Try buy and sell instead.
Investor’s Digest of Canada, MPL Communications Inc.
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