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Up, up and away?

One analyst thinks that the markets may still have room to run, while another says that yield-oriented investors should consider shifting from pipelines to producers

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

May 2, 2013

by Max Fawcett

It’s safe to say that Michael Giordano, the vice-president of investments and a portfolio manager at Stone Investments, is feeling bullish. Yes, he said on BNN yesterday, many of the world’s major indices are at multi-year or record highs, but he doesn’t think they’ve topped out just yet. “I’m not really concerned, although there might be some sectors that are a bit overvalued like utilities that are basically a drive to yield. Anything that’s yield oriented has been driven up – a company like Enbridge that’s trading at 26 times earnings, for example.”

The market itself is currently trading at a 15 times earnings multiple, and while that’s the historical average that doesn’t mean the multiple can’t or won’t expand. It reached 24 times earnings prior to the credit crisis in 2008, and 30 times during the tech bubble. His “magic number,” he said, would be a two-handle for both the Dow and the S&P 500. “As we start approaching the 20 level, that’s when I would be more concerned.”

Over in the Financial Post, TriVest’s Martin Pelletier makes an intriguing case that oil and gas producers are a better bet than infrastructure and pipeline companies going forward when it comes to generating the income investors are looking for. “Interestingly, investors seem to be looking past the sector’s large capital commitments with the average payout ratio being 200 per cent. This means many of these infrastructure companies are paying out twice their current cash flow when capital spending and dividends are combined. This is fine and dandy in a low interest rate environment, because they can access low-cost debt to pay the dividend. But what happens when interest rates rise and the debt-to-dividend strategy is no longer an option?”

That’s why, he says, his firm thinks the gap in valuation between energy infrastructure stocks like TransCanada (TSE:TRP) and Enbridge (TSE:ENB) and producers like Suncor (TSE:SU) and Cenovus (TSE:CNV) isn’t sustainable. “This gap could also represent some near-term downside risk for investors herding into the infrastructure space, especially if certain pipeline projects such as the Keystone or Gateway do not get approved. There could be even more downside risk should interest rates normalize. Therefore, the safer trade for investors chasing energy income is through the beaten-up Canadian oil and gas producers.”

Could Suncor’s recent dividend increase portend a broader shift on the sector’s part towards returning cash to shareholders? If so, it might pay to get there ahead of the crowd.


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