2 Picks to Tackle the Year-End Rally

09/27/2011 3:00 pm EST

Focus: MARKETS

Robert Gorman

Chief Portfolio Strategist, TD Waterhouse Canada, Inc.

Robert Gorman of TD Waterhouse Canada shares his outlook for the markets in this exclusive interview with MoneyShow.com, explaining why the fourth quarter may surprise investors, and sharing two dividend stocks that should ride this rebound all the way to the top.

Give us your view on the direction for the US markets and where you see the major indices headed.

The big issue at this point is the possibility of a double-dip recession. While the probability has increased, we don’t think it is the most likely outcome, so we don’t think we’ll have a double dip.

On the positive side of the ledger, evaluations are very reasonable in terms of P/Es, relative to fixed-income markets. Monetary policy is very expansive, and we think you’re going to see more M&A activity driven by very high cash balances etc.

We think the markets are going to rebound in the final quarter of this year. I’m expecting a strong fourth quarter in 2011, and I’m going to stick with my target for the year on the S&P 500 of 1,385.

What do you see as some of the major themes you expect to take place in the US markets this year?

Well, several points. First of all, we had forecast a rotation from the smaller-company shares into the large-caps, and this has happened so far pretty much in line with expectations. To this stage, the S&P 500 has outperformed the Russell 2000 by about 500 basis points year-to-date, so that’s unfolding pretty much as we thought.

This is being reinforced by an increasing shift into dividend-growth stocks. For the first time since the 1950’s, the dividend yield of the S&P 500 exceeds the yield on the ten-year Treasury bond, so that lends itself into a shift into the bigger companies which pay higher dividends.

The third point is that we are seeing what I think is a new era of increasing household conservatism when it comes to fiscal matters. Household debt levels are declining, and I think they’re going to go far lower than people think, to levels we haven’t seen since the 1980’s. The savings rate I think will also go up perhaps to the 8% level in the coming few years in line with levels we haven’t seen in over 20 years.

All this is being driven by demographics. As boomers look at the retirement years and the fact that real estate values are not going to go up to prop up their net worth, that of course will play itself into the consumer sector. Look for less durable goods as opposed to durables and big-ticket items. Conspicuous consumption will be conspicuously absent.

Give us some of your favorite selections within some of the equities. You had mentioned dividend growth names for example. Any favorites there?

Yes. Johnson & Johnson (JNJ)…over this year to date it is up in a down market.

JNJ is trading at a pretty modest multiple of maybe 12 times this year’s earnings, 11.5 times next year’s, with a 3.5% dividend yield and a AAA credit rating. Plus a catalyst in the form of some newly approved drugs from the FDA.

At the same time, PepsiCo (PEP) I think has underperformed, selling at a P/E multiple of 13 versus a much higher multiple for its peers, and it has room to expand in emerging markets, which should be a good avenue for growth for them. So I think that is another good dividend growth name to look for in the coming year.

Now Bob, do you own any of these either professionally or personally?

We own these for our client portfolios. I’m a client as well so, yes, I would own them as a result.

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