Wednesday, August 19, 2015

Outlook for August 2015

We are well into the summer trading season. Q2 earnings are in full swing and the results on the surface seem better than expected, especially since most companies seem to be beating the expected dismal earnings estimates. But looking at the top-lines and its lower revenues all around in most of the large caps. Of course, there are exceptions with some companies reporting great numbers all round. The overall market still hovers close to the peak – with the Nasdaq lately reaching all time highs.
On the Fed front, Chairwoman Yellen has repeatedly indicated that one rate hike this year can be expected, although a growing number of economists question how the Fed can justify this while the global markets remains under pressure – and deflation is starting to rear its head again. In Canada, the Bank of Canada lowered the overnight interest rate again in July by 25 basis points following a 25 basis point cut in January 2015. The rate now stands at a low 0.50%. Most predictions expect this rate to be stagnant for the rest of the year.

Outlook for August 2015

In February, we started putting together an index-based ETF portfolio for my wife’s portfolio. In order to avoid buying at a market top, we started off with a modest amount of funds put to work. We will continue building our position over the course of the year. The portfolio details are shared here. As for my portfolio, I hold a decent amount of cash as discussed in my 2015 goals post. I am well above the 3-5% of cash position target to take advantage of market corrections.

Portfolio Considerations

Some of the stocks that I am keeping an eye on from my existing holdings:
  • Algonquin Power & Utilities (AQN.TO) owns and operates portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in North America. The company has operations in all three main segments of utilities – electric, water and natural gas. The company has a huge exposure to renewable energy generation. I dipped my toes in this company last month and will be looking to add to my position. The company has a yield of over 5% and has a 5-yr dividend growth rate of 15.5%.
  • Magna International (MG.TO) is the most undervalued stock in my portfolio, although the stock price has seen quite a run-up in the last couple of months. The fundamentals are absolutely fantastic and this company is relatively unknown outside of Canada, unless you follow the automotive sector closely. I am tempted to add to my position in this automotive parts giant with a 5-yr DGR of 76%.
  • Power Corp of Canada (POW.TO) is a financial conglomerate. While the main focus is insurance and asset management, the company invests in various other sectors of the economy such as utilities, media etc. The company announced its first dividend increase after six years in May 2015 with a 7.3% bump in dividends. I initiated a position after the announcement and will be looking to add further to this position. Details of this purchase shared here.
  • The railroad industry is facing some headwinds, bringing the stock prices down to very attractive levels over the last few weeks. I am keeping a close eye on my holding – Canadian National Railway (CNR.TO) (CNI) and hope to average down on my cost basis. Read my dividend stock analysis of CN here.
  • Kinder Morgan Inc (KMI) is down to an attractive level with a forward yield of ~5.5%. The dividend growth has been fantastic and the management has been able to keep the promises made so far. The company continues to make investments which keep its project pipeline growing and the cash flow increasing.
Possible new additions that I am looking at:
  • With the continued weakness in energy, I am contemplating adding a new name to the energy sector – shortlist includes Exxon Mobil Corp (XOM), Suncor Energy Inc (SU), and Enbridge Inc (ENB).
  • In the food and beverage sector, my watchlist includes Tyson Foods (TSN), Coca Cola (KO), PepsiCo (PEP), and Starbucks (SBUX).
  • In the industrial space, I am looking at Union Pacific Corp (UNP), Norfolk Southern (NSC), 3M (MMM), Raytheon (RTN) and General Dynamics (GD).
  • In June, I sold my Utilities ETF and am looking to add more dividend growing utility companies in addition to Algonquin Power & Utilities. I shared some of my thoughts in this post with an overview of the utilities sector, and this post specifically on the water utilities sector.  Some of the companies that stood out for me were: Southern Company (SO), Eversource Energy (ES), NextEra Energy (NEE), Canadian Utilities (CU.TO), American Water Works (AWK), and Aqua America (WTR).
  • Couple of other companies that have caught my attention lately are – Brookfield Infrastructure Partners LP (BIP.UN.TO, BIP) and Brookfield  Renewable Energy Partners LP (BEP.UN.TO, BEP). The companies have a high starting yield and are also dividend growers with respectable rates.

Dividend Increases

I am expecting dividend increase announcements from one companies in my portfolio.
  • Bank of Nova Scotia (BNS) – last increase was 3% in March 2015.
What are your thoughts on the stocks mentioned here? Do you own them or are they on your watchlist? What do you think of the current market levels and buying here? Make sure to leave a comment below as I value reading your questions and comments.

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