Large Cap US High Tech – EPS Growth outlook to 2019

Comparing the earnings outlook from Dec 31, 2016 – Dec 31, 2019  for the following :

Facebook, Alphabet, Microsoft, Apple, Nvidia, Netflix, Texas Instruments, Oracle and Amazon

While Amazon is technically in the Consumer Discretionary sector, I still view this company as high tech.

The most consistent year over year earnings grower remains Facebook by a wide margin. Over the period its projected EPS growth is almost 89%.

The two fastest growing companies are Netflix and Amazon with projected growth rates over the period of 664% and 201% respectively.

The two slowest growing companies are Microsoft and Oracle with expected EPS growth rates over the period of 24% and 26% respectively.

Investors still need to compare PE valuations relative to these projected EPS  growth rates in order to make their investment decisions.

My sample Growth portfolio includes Facebook, Alphabet, Microsoft, Apple, Amazon and Nvidia.

Pure Multi-Family REIT – 2nd quarter earnings report

Operating Revenues up 12.6% yr / yr

Operating Expenses up 21.2% yr/yr

Net Rental Income up 9.6% yr / yr

Average Monthly rent increase up 3.2%

Funds from Operations 7 cents, down from 12 cents last year

Dividend Payout almost 142%, vs almost 81% last year

While the fundamentals look fine, the sharp decline in funds from operations combined with the very high dividend payout does not bode well in a rising interest rate environment.

My recommendation is to sell  this REIT and use the proceeds to buy my three remaining REIT names, Chartwell Retirement, Canadian Apartment and Pure Industrial.

Canadian Apartment REIT – 2nd Quarter Results

Operating Revenues up 7%  yr/yr

Net Rental Income up 8.5% yr/yr

Average Apartment Monthly Rent up 3.5% yr/yr

Apartment Occupancy Rates 98.6%

Funds from Operations per unit  46.3 cents

Cash Distributions per unit 32.0 cents

Funds from Operations Payout ratio 69.1%

Diversifying portfolio into Netherlends

Only 6% of suites in Alberta

Only 3.7% of company’s total Ontario properties to be affected by new rent control rules affecting properties built after 1991.

Management continues to expect modest annual rent increases, while maintaining high occupancy rates.

Future rent increases combined with gradually rising dividends will more than offset the negative effects from rising interest rates.

Continue to recommend Canadian Apartment REIT.

Freehold Royalties

Freehold reported a very strong second quarter and raised its guidance for the remainder of the year.

  • Royalty Revenues up 19% yr/yr
  • Funds from operations up 32% yr/yr
  • Operating Income up 26% yr/yr
  • Net Debt down 49%
  • Average daily production up 5% yr/yr
  • Wells drilled on own land up 152% yr/yr
  • Net debt to 12 month trailing funds from operations  0.40 times
  • Free cash flow yield  6.19-6.80%, one of highest in industry
  • Dividend yield of 4.25% with dividend payout of 56% at low end of range
  • Much cheaper valuation than its major royalty competitor, PrairieSky Royalty
  • 1 year Total Return up 28%, vs. PrairieSky at 14.5% and iShares Canadian Energy ETF XEG at -8.16%

I continue to like Freehold as a long term holding.

Adding Enbridge to Income and Growth Portfolios

After its recent price decline of 9%, I am adding Enbridge to both my Income and Growth model portfolios.

The stock provides an attractive 4.66% dividend yield at current prices.

More importantly, the company has a history of rising dividends and this trend is expected to continue with projected annual dividend growth of 10-12% for the next five years.

This dividend growth is predicated on rising operating cash flows from many new projects including its recent acquisition of Spectra Energy.

Spectra Energy will provide the combined company with a more diversified balance of crude oil and natural gas distribution.

How did Wilbur Ross, Trump’s Commerce Secretary make his fortune?

Wilbur Ross has been asked by Trump to revamp NAFTA in order to benefit the US.

Despite all the opposition from Canada, Ross is proceeding to impose both softwood lumber and the newly rumoured steel import tariffs.

Who knows what industry he will target next?

Ross made his fortune in 2002 by buying up bankrupt steel companies and then encouraging the US President at the time,  George Bush, to impose a 30% tariff on imported steel.

This led to a 25% increase in domestic steel prices.

Ross sold his steel company only two years later for $4.5 billion.

This is the man that Canada and Mexico is negotiating with.

Guess who is going to win?

Rising Interest Rates – How to position your investments to benefit

Sector and Asset Class Beneficiaries of Rising Rates:

  • Canadian, US and Global Banks
  • Canadian, US and Global Insurance Companies
  • Canadian Rate Reset and Floating Rate Preferreds

Sector and Asset Classes that are penalized from rising rates:

  • Equity Sectors – Utilities, REIT’s, Telcos
  • Bonds, especially Strip and Long

Removing Firm Capital and Equitable Bank’s High Interest Savings Account

As a result of ongoing issues with Home Capital combined with the possibility of a Canadian housing bubble, I am removing Firm Capital Mortgage Investment Corp. from my sample Income Portfolio.

While Firm Capital has not yet experienced any financial problems with its business, it is nevertheless in the same quasi bank mortgage space as Home Capital and Equitable Group.

In addition I am removing Equitable Bank’s High Interest Savings Account from both my sample Income and Growth Portfolios.

Buy iShares US Regional Bank ETF IAT

Over the last month and a half, the US 10 year bond yield fell as a result of some of the failed Trump policies.

This resulted in both the major and regional US banks to fall up to 10% over this period.

However the outlook for rising US interest rates remains intact and this recent selloff provides a buying opportunity.

I am recommending a US investment in the iShares US Regional Bank ETF – symbol IAT.

Switch from Universal Health Services into Johnson and Johnson

Based on some recent statements from a US Republican Senator accusing Universal Health Services of questionable pricing and business practices, I am recommending a switch into Johnson and Johnson. These type of issues can only get worse.

Johnson and Johnson’s share price has come down recently based on some short term earnings issues and currently provides a good buying opportunity.

Vital Factors to consider in Preferred Share investing

  • Very confusing to analyze
  • Limited information available with the exception of PrefBlog, some online brokerage sites
  • Individual issue credit ratings are lagging indicators
  • No real credit research available unless one uses the common stock research
  • Preferred shares are really a form of equity and are not fixed income
  • Dividends can be cut anytime
  • Cumulative dividend feature does not protect investors in case of bankruptcy
  • Preferred share market suffers from liquidity issues. Non taxable pension funds do not invest
  • Investors must be properly informed of differences between perpetuals, rate resets, retractables and floating rate preferreds
  • Never assume an issue will be called at the $25 issue price unless it is in the financial best interest of the company
  • For rate resets, investors must look at the current yield of comparable issues in addition to the expected rate reset yield of the issue in question
  • If the new reset rate is much lower than both its current yield  addition to other comparable new or existing issue current yields,  the probability of the issue being  called is very remote
  • When in doubt, contact the company’s investor relations department to confirm the features of the preferred

Switch out of UnitedHealth Group into Universal Health Services

Based on my previous blog regarding the failed repeal of Obamacare last Friday, I am recommending switching out of the large US health insurers into the hospital management companies.

More specifically I am advising a complete switch out of UnitedHealth Group into Universal Health Services, an acute care and surgical hospital management company. The company has a healthy balance sheet and is expected to grow its per share revenues, earnings, cash flow and dividends at a very satisfactory rate over the next few years.

Investment Consequences from a failed repeal of Obamacare

Last Friday’s proposed Trumpcare revisions were met with a lot of resistance within the Republican party.

Despite the Republican control of the House of Representatives, Trump and Ryan could not convince more liberal Republicans to vote against their respective constitutents’ concerns about ensuring that the 30 million recently insured remain insured.

To no avail, Trump did attempt to bully his party House Representatives to vote in his favour.

This bill will most certainly need to be completely revamped if it has any real chance of getting passed.

It is not likely that a new vote will occur anytime in the near future.

My last newsletter highlighted that the large US insurance companies would be major beneficiaries under a repeal or revision to Obamacare.

However based on these recent events, the apparent losers now become the winners with Obamacare continuing in its present form for the time being.

The hospital management companies will continue to insure all those 30 million people that would have been mainly uninsured once again under the proposed Trumpcare changes.

My recommendation is to switch out of the large US health insurance companies into the hospital management companies.

TD continues to underperform Royal Bank

Since TD Bank’s recent allegations against its selling practices brought to the public’s attention by some of its employees and customers, the stock has underperformed Royal Bank by a significant amount.

Even after its initial drop, its share price continues having difficulty keeping up with its peers.

The class action lawsuit filed in the US against TD is ongoing.

While Wells Fargo’s specific situation regarding its employees may have been more widespread than TD’s, the long lasting negative effects are similar.

Switch out of TD Bank into Royal Bank

Today TD Bank stock fell by more than 5%. The  report by CBC stated  that the bank had pressured its staff to switch their clients into higher fee accounts and into increasing the credit limits on both overdraft protection and credit cards without the clients’ permission,  in order to meet unachievable sales targets. While these practices are most likely not unique to TD and occur more frequently than one would think,  the bank was caught with their pants down and will have to suffer the consequences if the claims can be substantiated.

This allegation is eerily similar to what transpired with Wells Fargo and some of its staff about 18 months ago. The bank was ultimately fined $185 million, saw its share price decline by almost 20% and  its reputation suffer long lasting consequences.

In addition to CBC’s report, a class action lawsuit is about to be brought against  TD Bank  by disgrunted clients who had their accounts tampered with.

While Wells Fargo’s share price ultimately recovered over the last eighteen months, the damage to its reputation remains a real issue.

Furthermore its share price has continued to underperform its peers.

Taking all these factors into account, I am removing TD Bank from my sample portfolios and replacing the position entirely with Royal Bank.