Let’s agree on one thing. It’s probably not a good idea to count on the stock market for consistency these days.
When the markets are good, they’re very, very good. Two days later, they’re awful. And remember, Canada’s benchmark index generally gets its upward propulsion from a rather small group of stocks.
So let’s act as though the markets were going to be erratic for the foreseeable future. Let’s pick stocks that can weather any kind of a storm.
That’s what Mr. Larry MacDonald has done in the latest issue of Investor’s Digest of Canada. Assuming that the worst is still before us, this noted investment analyst has selected five securities that “can hold up through good times or bad.”
Time to fight inflation
We all know the problems that must be worked out before sanity and stability return to the markets: the high price of food and fuel, the collapse of housing in the U.S. and the overextended credit that has poisoned the U.S. banking system — and have not exactly been welcome up here, either.
Central banks are programmed to fight inflation. This means “they may be willing to allow recessionary conditions to emerge in 2008 as the price for nipping cost-push inflation in the bud,” says Mr. MacDonald.
The kind of stringency required to do this often depends on where we are in the political cycle. Since Mr. Ben Bernanke, the chairman of the U.S. Federal Reserve Board, is early in his first term, he has plenty of time to turn things around before his second term comes up.
Ditto for the next president. He will inherit an economic mess that can’t be blamed on him. He’s got time, too.
So if these gentlemen are willing to face down a recession to fight inflation, it’s time for the rest of us to hedge our portfolios, says this analyst. The first two of the five sturdy investments he has selected are income trusts with staying power.
Starting with waste
Since there seems to be so much waste around these days, why not start with waste management? It’s a recession-resistant industry, says Mr. MacDonald, and BFI Canada Income Fund (TSX: T.BFC.UN, Stock Forum) is one of the largest companies in North America in non-hazardous waste.
Most of this company’s revenue comes from three- to five-year contracts. The “seasoned and committed management team” can also be expected to grow by purchasing smaller operators, says the analyst.
With almost two-thirds of its operations in the U.S., BFI had a crimp in its earnings when the Loonie soared. But now that our dollar appears to have gone about as far as it can go, that currency problem is likely over.
Better yet, the company is well able to absorb the extra tax burden that 2011 will bring to income trusts. The distribution, which yields 8.1, “is projected to rise even past this date,” says Mr. MacDonald.
BFI is already taxed on the 60% of its profits derived outside of Canada, but with a payout ratio of 80%, continuing growth and a solid financial base, it doesn’t look like this trust will hit a glass ceiling in 2011. It is trading at $22.73.
A movie fortress
Next we go to the movies. Cineplex Galaxy Income Fund (TSX: T.CGX.UN, Stock Forum) “has built a fortress-like position in the cinema market,” says Mr. MacDonald. The largest movie exhibitor in Canada, it controls 70% of box office share across the country.
Cineplex already has enormous pricing power with customers and suppliers alike. But it is “rolling out new initiatives” to add to its revenues and earnings. Like in-theatre advertising, of which it controls 90%. Then there’s alternative screen content such as opera, NHL hockey and concerts, a loyalty program, 3D projection and online DVD sales.
When 2011 arrives, Cineplex will have over $500 million in tax pools to meet the new trust tax. With its upward growth trajectory and 60% payout ratio, it should continue to increase its distributions. Yielding 8.7%, Cineplex trades at $14.20.
A well-trained sales force
Mutual funds may not seem like the best place to be right now, but it’s a different story with IGM Financial (TSX: T.IGM, Stock Forum) in Mr. MacDonald’s opinion. The Investors Group “enjoys a strong market position thanks to a well-trained in-house sales force, which markets the firm’s mutual funds through a financial planning approach.”
The stock is relatively cheap, he adds, for its high dividend yield of 5%. The annual growth rate of the dividend has been 20% over the last 10 years.
The market is justifiably worried about fund redemptions in a rough market, but this analyst’s contention is that IGM’s sales force will keep them to a minimum. Plus they supply “hidden value by offering ancillary services such as tax and estate planning free.”
And, as baby boomers sail into retirement, all of these services will be in high demand. IGM is trading at $39.20.
Immune to economic downturns
If you’re looking for a company that is immune to economic downturns, TransCanada Corporation (TSX: T.TRP, Stock Forum) fits the bill as well as anybody, says Mr. MacDonald. With its wide reach in power generation, gas transmission and fuel storage, it just keeps rolling along.
The analyst quotes Mr. Don Anderson, a portfolio manager at Philips, Hager and North. “When we drill into TransCanada’s financials, we see an estimated annual growth rate of 8% in free cash. This supports our expectation of 10% annual growth in the dividend.”
The annual dividend of $1.44 now yields 3.8%. The stock stands at $38.20.
Stagflation to deflation
The stocks listed above have another potential advantage. They are largely sensitive to interest rates. So if stagflation — high inflation and high unemployment — turns into deflation — a drop in prices and a severe tightening of credit — they should do quite well.
“Bonds will also provide a refuge,” Mr. MacDonald informs his readers in Investor’s Digest of Canada. Individual investors can put together a basket of bonds through index and exchange-traded bond funds. He suggests the TD Canadian Bond Index e-Series fund or iShares Lehman one- to three-year Treasury Bond Fund (NYSE: SHY, Stock Forum).
This analyst has selected securities he believes will fare well in good markets or bad. In short, don’t waste your time and energy trying to figure out what the market will do, look for investments that could care less what the market is doing.