B12 O THEGLOBEANDMAIL| THURSDAY,OCTOBER24,2019
EYEONEQUITIESDAVIDLEEDER
HUSKYENERGY(HSE-TSX)
CLOSE$9.52, UP 13¢
CANADIANNATIONAL(CNI-NYSE)
CLOSEUS$89.54,DOWN 29¢HYDROONE(H-TSX)
CLOSE$24.38, UP 6¢AECONGROUP(ARE-TSX)
CLOSE$18.15,DOWN 7¢ENERPLUS(ERF-TSX)
CLOSE$8.37, UP 13¢After Desjardins Securities
trimmed its oil and natural gas
price decks ahead of the start of
third-quarter earnings season,
analyst Justin Bouchard lowered
his target forHusky Energy Inc.
“Investor apathy will continue to
be the key challenge for most
stocks this quarter, particularly
following Monday’s indecisive
federal election results,” the com-
pany said.
Target:Mr. Bouchard maintained
a “hold” rating and lowered his
target to $12 from $15. The con-
sensus target is $12.25.
Although Canadian National
Railway Co.’sthird-quarter re-
sults exceeded expectations on
the Street, Citigroup analyst
Christian Wetherbee called the
results “lower quality,” emphasiz-
ing both volume and profit head-
winds “appear to be intensifying.”
“With estimates falling post-re-
sults, we’d expect pressure on
shares,” he said.
Target:Maintaining a “buy” rat-
ing, he cut his target to US$102
from US$103. Consensus is
US$94.79.“Relatively” moderate weather
conditions during the third quar-
ter are likely to cause a slowdown
inHydro One Ltd.’sgrowth tra-
jectory, according to Laurentian
Bank Securities analyst Nauman
Satti. Ahead of the Nov. 7 release
of its results, Mr. Satti said he’s
projecting electricity demand to
dip 7 per cent from the same peri-
od a year ago.
Target:Mr. Satti maintained a
“hold” rating and $24 target. Con-
sensus is $24.30.Aecon Group Inc.’s“already com-
pelling growth outlook has im-
proved over the last five months,”
according to Canaccord Genuity
analyst Yuri Lynk. He expects Ae-
con to benefit fromSNC-Lavalin
Group Inc.’sdecision to pull out
of the Canadian infrastructure
construction market.
Target:Mr. Lynk maintained a
“buy” rating and $27 target. Con-
sensus is $25.14.RBC Dominion Securities analyst
Greg Pardy saidEnerplus Corp.
remains his favourite intermedi-
ate producer, pointing to “its con-
sistent operating and financial
track record, best-in-class balance
sheet and capable management
team.” “Inspection of Enerplus’
actual results since 2016 points
towards a producer that consis-
tently meets or exceeds street
consensus estimates on a quar-
terly basis,” he said.
Target:He kept an “outperform”
rating and $13 target. Consensus
is $14.80.WHAT ARE WE LOOKING FOR?
A way to augment your index
fund.
THE SCREEN
If you are an index investor in the
main market cap-weighted
benchmark in Canada (the S&P/
TSX Composite Index) at the end
of this past calendar quarter,
roughly 60 per cent of your hold-
ings were invested in three of 11
economic sectors (financials 32
per cent, energy 16 per cent and
materials 11 per cent).
Such is the nature of the Cana-
dian equity markets – a stark
contrast to our U.S. neighbours,
where we see diversity among
various economic sectors. That
said, for investors looking to aug-
ment their domestic index expo-
sure, today’s strategy seeks qual-
ity companies outside of the
three aforementioned sectors. Of
the 233 stocks currently in the in-
dex, 126 of them are not in these
sectors. Using Morningstar CPMS,
I ranked these 126 companies on
the following metrics:
The price-to-earnings ratio of
the stock, relative to its own 10-
year historical median (here a fig-
ure of 0.9 implies that the stock’s
P/E is 10 per cent lower than the
median over the past 10 years);
Five-year growth rate in earn-
ings per share (on average, how
much the company’s bottom lineis growing each year over the past
five years);
Five-year average return on
equity;
Five-year price beta (a mea-
sure of sensitivity, in this case to
the S&P/TSX Composite Index.
In trending markets, a beta less
than one implies that the stock
has moved less than the market,
lower figures preferred).
To qualify to be purchased to-
day, the company must have
posted positive trailing fourquarters of operating earnings
and a positive return on equity
(not shown).MORE ABOUT MORNINGSTAR
Morningstar Research Inc. pro-
vides independent investment
research in North America, Eu-
rope, Australia and Asia. Its re-
search tool, Morningstar CPMS,
provides quantitative North
American equity research and
portfolio analysis to institutionalclients and financial advisers.
CPMS data cover more than 95
per cent of the investable North
American stock market.WHAT WEFOUND
I used Morningstar CPMS to back
test this strategy from January,
1999, to September, 2019. During
this process, a maximum of 15
stocks were purchased and
equally weighted with no more
than three per economic sector
(excluding the three mentioned
above). Once a month, stocks
were sold if their rank fell below
the top 35 per cent of the index, if
EPS turned negative, or if ROE
turned negative.
Over this period, the strategy
produced an annualized total re-
turn of 9.3 per cent while the
S&P/TSX Composite advanced
7.1 per cent. In the trailing 12-
month period ended Sept. 30, the
strategy produced 13.9 per cent
while the index gained 7.1 per
cent.
The 13 stocks that qualify for
purchase today are listed in the
accompanying table. It is always
recommended to speak to a fi-
nancial adviser or investment
professional before investing.Strategylooksforqualitybeyondfinancials,energyandmaterials
SelectTSX-listedstocksoutsidethefinancials,energy&materialssectorsRANK COMPANY SYMBOLMORNINGSTAR
SECTORMKT.CAP.
($MIL.)P/E
REL.TO
10YMED.5Y
EPSGRTH.
RATE(%)5YAVG.
ROE(%)5Y
HIST.
BETARECENT
CLOSE($)DIV.
YLD.
(%)TTL.RTN.
FROMMONTHEND,
12MAGO(%)
1 Alim.Couche-Tard ATD-B-TCons.Defensive 43,942.7 1.0 21.2 23.1 -0.2 39.03 0.6 24.9
2 NorthWestCo. NWC-T Cons.Defensive 1,363.6 0.9 3.0 21.9 -0.3 27.75 4.8 1. 3
3 QuebecorInc. QBR-B-TComm.Services 7,918.1 0.8 25.1 72.2 0.4 30.94 1.5 21.1
4 NFIGroupInc. NFI-T Cons.Cyclical 1,759.5 0.5 38.6 17.7 0.5 28.21 6.0 -32.8
5 WinpakLtd. WPK-T Cons.Cyclical 3,014.7 0.9 9.5 14.5 -0.2 46.38 0.3 1.8
6 RogersComm. RCI-B-T Comm.Services 33,986.0 0.9 11.3 28.1 0.2 66.39 3.0 0.9
7 NorthlandPower NPI-T Utilities 4,651.6 0.4 16.8 20.6 0.7 25.93 4.6 33.5
8 ExtendicareInc. EXE-T Healthcare 820.6 0.9 9.5 188.3 0.7 9.22 5.2 31.3
9 AirCanada* AC-T Industrials 12,088.5 0.7 7.28,471.0 0.9 45.43 0.0 81.9
10 ConstellationSoft. CSU-T Technology 27,469.5 1.1 23.6 101.9 0.8 1,296.25 0.4 46.6
11 KinaxisInc. KXS-T Technology 2,154.4 0.8 25.4 24.3 0.8 82.27 0.0 -7.4
12 AlgonquinPower AQN-T Utilities 9,423.4 0.8 26.5 8.5 0.4 18.15 4.1 43.6
13 AeconGroupInc. ARE-T Industrials 1,107.1 0.7 22.5 5.8 0.4 18.22 3.2 -0.8
*AC’sROEisextremelyhighowingtothecompany'snegativebookvalueofequity.Thisextremevaluewasaccount-
edforintheanalysis.Source:MorningstarCPMSIANTAM
NUMBERCRUNCHER
CFA, relationship manager forCPMS
at Morningstar ResearchInc.
H
ealth care is a growing sec-
tor with aging baby boom-
ers driving demand for
medical products and services,
while innovation offers new tech-
nologies and treatments. The sec-
tor is also considered less sensi-
tive to market downturns, as peo-
ple continue to get sick and age re-
gardless of the economic
environment.
Canadians seeking a diversi-
fied way to play the health-care
sector are turning to exchange-
traded funds. There are few
homegrown options, but plenty
of choices in the United States and
globally. The Globe asked three
experts for their top ETF picks in
the health-care sector.
MIKEPHILBRICK,PRESIDENT
OFRESOLVEMANAGEMENT
The aging population, rising de-
mand for health-care products
and services and strong financials
among companies in the sector
are reflected in ETF prices today,
Mr. Philbrick says. “Be careful that
all of that growth is not already ac-
counted for,” he says. The health-
care sector is more robust in times
of economic weakness, he adds,
“but that doesn’t mean there’s no
circularity.” Health care can be
subject to the “political whims of
the day,” Mr. Philbrick says. At the
same time, he sees “a tremendous
amount of innovation in the way
we currently deliver health care”
The pick:Harvest Healthcare
Leaders Income ETF (HHL-T)
A Canada-based fund with a port-
folio of 20 major stocks that are
global in nature, Harvest Health-
care Leaders Income provides sig-
nificant yield, Mr. Philbrick says.
At the same time, its managers
write covered-call options against
up to one-third of each of the
stocks in the portfolio to generate
extra income for distributions, a
strategy that is a hedge against po-
tential downturns. There is a hefty
management fee of 0.85 per cent,
but it costs much more for inves-
tors to do covered-call writing
outside of such a fund, he says.
The pick:First Trust U.S.
Health Care Sector Index ETF
(FHH-T)
Mr. Philbrick likes funds such as
this that include small and mid-
size capitalizations and small po-
sitions in companies, which
means they “have an opportunity
for greater growth and should
provide greater returns.” This ETF
will appeal to those with a “long
term view of investing,” he says. It
has a fee of 0.70 per cent and has
been underperforming in the past
five years, but he’s not put off be-
cause its management “thinks of
where the puck might go to.”ELISABETHKASHNER,
DIRECTOROFETFRESEARCH
ANDANALYTICSATFACTSET
The health-care ETF field is divid-
ed into broad-based and niche
markets, Ms. Kashner says, which
each have their attributes for in-
vestors. “The U.S. offers cheaper
access than Canada at this time,”
she says. At the same time, many
ETFs south of the border include
international holdings.
The pick:Vanguard Health
Care ETF (VHT-A)
A broad-based fund that has a low
degree of active risk, the Van-
guard Health Care ETF “does the
best job of the funds in reflecting
the entirety of the U.S. health care
market,” Ms. Kashner says, while
its holdings are also 37.5-per-cent
international. This low-priced
ETF, with a management fee of
just 0.10 per cent, includes small
and mid-caps as well as large caps.
“You shouldn’t narrow down the
opportunity unless you have a
good reason to do it,” she says.
The pick:VanEck Victors Bio-
tech ETF (BBH-Q)
This isn’t the biggest or best-
known niche biotech fund out
there, Ms. Kashner says, but it“does a good job of reflecting the
global biotech market.” It has a
reasonable management fee of
0.35 per cent and includes mostly
U.S. securities. It has some global
revenue exposure, as well as a rea-
sonably large exposure to phar-
maceuticals. “The line between
biotech and traditional health
care is getting more blurred all the
time,” she says.JOHNHOOD,PRESIDENT
ANDPORTFOLIOMANAGEROF
J.C.HOODINVESTMENTCOUNSEL
Health care “is a demographic
play,” says Mr. Hood, who looks
for diversification in health-care
ETFs. With most of the action in
the U.S., “I’m avoiding big phar-
ma, simply because of litigation,”
he says. “Everybody’s suing every-
body down there.” He especially
likes ETFs in the sector that em-
phasize health-care providers as
well as equipment providers, and
that come with as low a cost as
possible.
The pick:BMO Equal Weight US
Healthcare Hedged to CAD ETF
(ZUH-T)
Mr. Hood likes the significant
growth available in the BMO
Equal Weight US Healthcare ETF.
“It has very good diversification
and it’s also U.S.-dollar hedged,”
he says. He appreciates ETFs that
come at an even lower cost than
the fee of 0.35 per cent charged
here. “But I will pay up for some of
them if I think they’re worth it.”
The pick:U.S. Medical De-
vices iShares ETF (IHI-A)
The U.S. Medical Devices iShares
ETF has targeted exposure to U.S.
companies that manufacture and
distribute medical devices, which
is a growing side of the health-
care market, Mr. Hood says. This
ETF has an expense fee of 0.43 per
cent, which makes it relatively ex-
pensive in Mr. Hood’s books. “But
medical devices have actually
done quite well of late,” he says.Special to TheGlobe and MailMARYGOODERHAM
Sixhealth-careETFsthatcould
addimmunitytoyourportfolio
CANADIANSTOCKS
Canada’s main stock index fell midweek as the telecommuni-
cations sector retreated after Rogers Communications Inc.
cut its revenue and capital spending forecasts for the year.
The sector was the biggest mover Wednesday, losing 5.1 per
cent as Rogers shares fell 8.1 per cent to a new 52-week low
while competitors also lost ground. The decreases came after
the Toronto-based company cut its revenue outlook for the
year because of the popularity of new unlimited wireless data
plans.
The S&P/TSX Composite Index closed down 55.59 points at
16,335.93.U.S.STOCKS
U.S. stocks edged higher as investors shrugged off lacklustre
quarterly reports from industrial bellwethers Boeing Co. and
Caterpillar Inc., although a lower-than-expected revenue out-
look from Texas Instruments Inc. sent chip makers’ shares
lower. Shares of Boeing and Caterpillar rose more than 1 per
cent despite significant earnings misses from both compa-
nies. Boeing reported a 53-per-cent drop in quarterly profit
but reaffirmed the timeline for its 737 Max’s return to service.
Caterpillar’s Asian sales tumbled, but the company said tariffs
stemming from the U.S.-China trade war would have a smaller
impact on its business than previously forecast.
The Dow Jones Industrial Average rose 0.17 per cent, the
S&P 500 gained 0.28 per cent and the Nasdaq Composite add-
ed 0.19 per cent.
Advances in Apple Inc. and Facebook Inc. shares helped
buoy the major indexes. Apple shares rose 1.3 per cent after
Morgan Stanley said the iPhone maker’s soon-to-be-
launched video streaming service, Apple TV+, could boost its
services revenue. Facebook shares advanced 2.1 per cent after
chief executive Mark Zuckerberg sought to reassure U.S. law-
makers about the company’s planned digital currency, Libra.COMMODITIES
Oil rose about 2.5 per cent after government data showed a
surprise draw in U.S. crude stocks and as the prospect of deep-
er output cuts by OPEC and its allies offered support.FOREXANDBONDS
The Canadian dollar rose against the greenback, approaching
a three-month high it notched the previous day, as investors
expected further divergence in the interest rate policies of the
Bank of Canada and the Federal Reserve.
The British pound and the euro both stabilized against the
U.S. dollar as European Union leaders delayed a decision on
whether to grant Britain a three-month Brexit extension.
Canadiangovernment bond prices were higher across the
yield curve, with the two-year up 2 cents to yield 1.615 per cent
and the 10-year rising 9 cents to yield 1.510 per cent.
U.S. Treasury yields recovered from session lows to close lit-
tle changed in generally thin trading, as investors consolidat-
ed positions amid an overall lack of new catalysts to spur the
market in either direction.REUTERSANDTHE CANADIANPRESSMarketssummary
| REPORTONBUSINESS