Despite an economy that is still struggling, and a stubbornly high 9% unemployment rate, U.S. equities markets have been steadily gaining ground. Indeed, fund managers see further reasons for optimism in the face of significant headwinds.
\u201cThe economic cycle drives the profit cycle, which ultimately drives the market cycle,\u201d says Mark Chaput, vice president with I.G. Investment Management Ltd. <\/b> in Montreal and manager of Investors U.S. Dividend Growth Fund. \u201cIt doesn\u2019t necessarily all happen at the same time. Some market cycles lag and get distorted by high inflation or market bubbles. But over time, the market will follow profits.\u201d
There are always issues that dog the economy. \u201cThe ones that exist today are significant. But overall, the economic cycle is recovering,\u201d says Chaput, adding that cash-rich companies are expected to invest more on capital equipment. \u201cIn historical terms, perhaps the recovery off the bottom has been a little slower. But if I look at the 1990 and 2000 recoveries, this one is similar. It\u2019s also a jobless recovery.\u201d
Yet, Chaput believes the employment cycle is improving because companies are pushing productivity to the limit and must start hiring people. \u201cOnce you get the employment recovery, that will support consumption, which is very important for the U.S. economy,\u201d Chaput says. \u201cThe past 22 months have been stimulus-driven. But we\u2019re getting to the point at which the economy is self-sustaining. That\u2019s what the Federal Reserve [Board] is waiting to see. Then, it will start pulling back.\u201d
Rising consumption and a strong capital expenditures cycle will accelerate U.S. gross domestic product growth into 2012, he adds: \u201cEverything I see right now points to positive economic developments, which ultimately drive profit growth and the stock market.\u201d
A bottom-up investor, Chaput seeks companies that have a history of dividend increases and growth in earnings and cash flow. From a sector standpoint, about 19.7% of the Investors fund\u2019s assets under management are in industrials, followed by 17.6% in financials and 14% in consumer discretionary, with smaller weightings in sectors such as energy and consumer staples. The fund\u2019s currency exposure is not hedged.
One top holding in the 40-name portfolio is Mattel Inc., the toy maker that owns well-known brands such as Fisher-Price. \u201cIt trades at 12 times forward earnings and has US$1 billion in cash on its balance sheet,\u201d says Chaput, adding that the stock has a 3.5% dividend yield. \u201cIt has grown its dividend at about 15% compounded over five years. And it\u2019s buying back its shares.\u201d
The stock is trading at about US$26.80 ($25.20) a share. Cha-put has no stated target.
Another favourite is railway company Norfolk Southern Corp. \u201cWhen you buy a U.S. railway,\u201d says Chaput, \u201cyou get to benefit from attractive commodity themes, such as export metallurgical coal, while investing in a more conservative type of company. I like that combination.\u201d
Norfolk Southern stock is trading at about US$73.20 ($70.60) a share, or 13 times forward earnings. It has a 2.2% dividend yield and is expected to generate 15% earnings per share growth over the medium term.
Equally Bullish Is Noah Blackstein<\/b>, vice president with Toronto-based Goodman & Co. Investment Counsel Ltd. <\/b> and manager of Dynamic Power American Growth Fund, which is available in a U.S.-dollar version and both unhedged and hedged Canadian-dollar versions. \u201cThere are a lot of opportunities and a lot of secular growth in certain sectors that the U.S. dominates,\u201d says Blackstein, a bottom-up growth manager who is generally reluctant to make market calls.
Running a concentrated portfolio of about 25 names, Blackstein favours two sectors: infotech and consumer discretionary. Together, they account for about 80% of the Dynamic fund\u2019s AUM.
\u201cIn the technology space, we\u2019re undergoing a tectonic shift,\u201d says Blackstein. \u201cWe\u2019re at a point at which, as we move to greater mobility and away from PCs, we are changing technology architecturally. That\u2019s very disruptive. It\u2019s also a huge opportunity for companies that are positioned properly and can take advantage of it.\u201d
There are more stock-specific issues in the consumer discretionary sector, he adds: \u201cI am fairly bullish on the sector, but it\u2019s more to do with the consumer who sits in China, not the U.S. Whether it\u2019s luxury goods or gaming, the Chinese are changing the face of global consumption.\u201d@page_break@One of the Dynamic fund\u2019s top holdings is Starbucks Corp., the global retail purveyor of coffee. \u201cThere is an opportunity for management to improve margins \u2014 and they are doing that in the U.S.,\u201d says Blackstein. \u201c[Starbucks is] also continuing to grow internationally. That area holds a lot of promise. Starbucks\u2019 stores in China are actually more profitable than the U.S. stores.\u201d
But the real growth story is the US$50-billion global instant coffee market, which Starbucks has yet to tap, he adds: \u201c[It is] now aggressively pursuing that opportunity. It can increase its revenue, and do so at the margins that are 50%-60% higher than the retail business.\u201d
Acquired in Q1 of 2011, Star-bucks stock is trading at about US$36.25 ($34.90). \u201cWhen we do the math, we think the potential earnings power of the company is significantly above that,\u201d says Blackstein, who has no stated target.
Another favourite is Apple Inc. \u201cThe move to smartphones and tablets is still in the early stages,\u201d says Blackstein. \u201cNinety per cent of [Apple\u2019s] revenue will come from mobile computing. That\u2019s the big opportunity.\u201d
Although the mobile field is getting crowded, Apple still demonstrates a leadership role, adds Blackstein. Moreover, he points out that the stock is very cheap: \u201cWhen you are talking about a stock trading at a single-digit multiple and 20%-plus growth and a pristine balance sheet, it\u2019s still attractive.\u201d
Apple stock is trading at US$348 ($335.60).
There Is No Doubt That<\/b> the corporate sector has led the way out of the recession, says Jim Young, vice president with Toronto-based Invesco Trimark Ltd.<\/b> and manager of Trimark U.S. Companies Fund, which is available in hedged and unhedged versions. \u201cThere is a gradual pickup in the U.S. This cycle will probably see the consumers come to life more mid-cycle. Normally, they lead us out [of recession]; this time, they haven\u2019t. The good news is that in a couple of years, consumers will be in better shape. At that point, the housing market will also be looking a lot better.\u201d
As excess housing inventory is absorbed and affordability continues because of low interest rates, the housing market will improve. \u201cThat activity, combined with more corporate activity, will lead to more job formation,\u201d says Young. \u201cThe signs are positive, although the recovery is generally still modest. It\u2019s not a booming economy by any means. But there are opportunities around the world.\u201d
Admittedly, there are some risks on the horizon, and these are mainly political. \u201cWe need to address the deficit and decide where limited dollars will be spent on social programs,\u201d says Young. \u201cWith the Republicans in control in the House [of Congress], we\u2019re starting to approach these issues in a more adult fashion. Over the course of the next year, they have to make some progress \u2014 and there\u2019s no reason they cannot.\u201d
Technology, Young says, is one of the key equities market drivers. He points to the growing use of smartphones, as well as the proliferation of so-called \u201ccloud computing\u201d and retooling of the global energy infrastructure.
A \u201cgrowth at a reasonable price\u201d investor running a 42-name fund, Young has invested about 30% of the Trimark fund\u2019s AUM in technology, 14% in health care, 14% in financials, 12% in industrials, 12% in consumer discretionary and smaller weightings in energy and materials.
One of the largest technology holdings is KLA-Tencor Corp., a leading process-equipment supplier to the semiconductor industry. \u201cIf you are going to continue to advance manufacturing,\u201d says Young, \u201cyou need very sophisticated tools to ensure the process stays on track. KLA tends to be at the leading edge all the time.\u201d
A long-term holding, KLA stock is trading at about US$45 ($43.40) a share, or 10.5 times forward earnings. Young has a 12-month target of around US$55 ($52.90).
One large holding in the consumer discretionary space is Phillips-Van Heusen Corp, a dominant player in the men\u2019s shirt and tie business and owner of brands such as Calvin Klein and Tommy Hilfiger. PVH shares are trading at about US$69 ($66.40) apiece, or 13.8 times current earnings. Young has a 12-month target of about US$85 ($81.90).\tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
Rising consumption and increasing capital expenditures will boost GDP growth in 2012<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3017],"tags":[2384,2407,3129],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/334095"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=334095"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/334095\/revisions"}],"predecessor-version":[{"id":368630,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/334095\/revisions\/368630"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=334095"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=334095"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=334095"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=334095"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}