Banks, telcos are good buys

October 18, 2012 | Last updated on October 18, 2012
2 min read

When choosing equities, David Graham recommends sticking to the basics.

Focus on companies that have predictable earnings and positive balance sheets: they’ll do well regardless of the economy and markets. It’s not a time to take big risks since the markets are difficult to read.

Graham is the vice president of equities at CIBC Asset Management and manages the Renaissance Canadian Monthly Income Fund and Renaissance Diversified Income Fund, and co-manages the Renaissance Optimal Income Portfolio.

“We’re most overweight in Canadian banks,” he says. “We have a 32% weight compared to 20.5% for the index. In the telecom sector, we have a 13% weight compared to about a 5% weight for the index.”

Read: Canadian banks are safe and Canadians better than rest

These two sectors have yields of approximately 4%-to-5%, as well as predictable earnings and dividends.

Graham adds, “Pipelines or telcos, because they have those yields, tend to be trading at the upper range of their historical multiples, in the high teens [17x or 18x].” The same high multiples are occurring with REITs.

As well, “Banks stocks are giving you yield and are still trading [at] nine-to-10 times forward earnings.”

While investors continue to worry about the exposure banks may have to Europe and other unstable global economies, as well as how slowdowns in housing might impact their performance, Graham is optimistic. He predicts bank earnings will grow in the 5% range.

Read: When markets give you volatility, invest

“The one good thing affecting all companies is they don’t have a lot of capital spending needs in this type of environment, where sales are only growing at around 3% or 5%. They have good cash flow to pay their dividends and likely raise them.”

He suggests looking for companies that are undervalued to make sure you’re not overpaying for yield and returns. And while banks are generally stable investments, there are other opportunities.

Read: Dividends remain the smart play

“The value is in more cyclical-type companies,” like mining or oil companies.

But be wary of commodity fluctuations when considering these businesses. And, if oil prices drop, investors will worry about the dividends from those stocks more than they would from a bank or a diversified energy producer.

Also read:

The best ways to own Canadian banks

Banks stocks still viable

Canadian equities bounce back

How to analyze prospective investments