Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel
Focus: Canadian stocks

MARKET OUTLOOK

Stocks are making fresh all-time highs amidst a better-than-feared and overall very decent slate of Q3 corporate earnings. Despite a 17-per-cent rise in the S&P/TSX Composite Index year-to-date valuations remain undemanding, with the index trading at just 15.6-times expected 2020 earnings versus a 10-year average price-to-earnings multiple of 19 times and offering a 3.1-per-cent dividend yield versus a 10-year average yield of 2.9 per cent. Market leadership this quarter has pivoted away from the technology and growth leadership we saw earlier in the year and has also moved away from the defensive/bond proxy sectors like utilities and real estate that benefitted from plunging interest rates. The leadership baton has been passed back to more pro-cyclical areas of the market like industrials, financials and energy where some excellent companies have long gone overlooked by investors and where some compelling value opportunities still exist. Seasonality also remains very favourable through year-end, with November and December some of the most consistently positive months for Canadian stocks going back three decades, as the oft-discussed Santa Claus rally unfolds.

TOP PICKS

SUNCOR ENERGY (SU:CT)
Latest purchase in November 2019 at $41.34.

Suncor is Canada’s largest integrated oil company and the longest-running operator of oil sands assets in the country. Their oil sands assets have a 36-year reserve life index and, with breakeven oil prices near $30, the company generates very healthy free cash flow. Downstream integration via their ownership of four world-class refineries and approximately 1,750 gas stations has been very effective in insulating Suncor from the steep discounts other Western Canadian oil producers have recently. With their final two major expansion projects (Fort Hills and Hebron) now in production, Suncor’s capital expenditures fell 17 per cent last year and should fall a further 5 per cent this year, allowing them to maintain their established pattern of dividend increases, which have grown at an 8-per-cent compound rate the last five years, and providing optionality to step up the pace of their $3-billion annual share buyback program.

DOLLARAMA (DOL:CT)
Latest purchase in November 2019 at $45.43.

Dollarama is Canada’s largest dollar store chain, with approximately 1,250 stores. It plans to grow to 1,700 over the next several years. The company’s key competitive advantages include procurement and merchandising expertise which allows them to price extremely sharply, expertise in securing high traffic locations at reasonable expense as well as operational efficiency within their stores and distribution centres. Growth requires very modest capital and is easily financed internally such that the company generates nearly $600 million of annual free cash flow, much of which it returns to shareholders via dividends and share buybacks. Dollarama has grown earnings at a compound rate of 20 per cent over the last five years and should continue to grow at a low- to mid-teens pace in the coming years. The company recently acquired a majority stake in its joint venture partner in Central America, Dollar City, which further extends and accelerates its growth in faster-growing economies where modern retailing remains in its infancy.

ENBRIDGE (ENB:CT)
Latest purchase in November 2019 at $48.88.

Enbridge is the largest pipeline company in Canada, best known for its crown jewel asset, the Mainline/Lakehead system, which carries roughly two thirds of the oil produced in Western Canada to consumption markets. Enbridge transports 22 per cent of all natural gas and 25 per cent of all oil production in North America. These highly strategic assets offer excellent earnings visibility via long-term service contracts that are largely free of any commodity price or volume risk. With a dividend yield of 5.9 per cent and plans for annual dividend increases of 10 per cent, Enbridge offers an attractive combination of current income and very secure and visible medium-term growth prospects.

PAST PICKS: DEC. 4, 2018

SUNCOR ENERGY (SU:CT)

• Then: $42.61
• Now: $42.24
• Return: -1%
• Total return: 2%

ALIMENTATION COUCHE-TARD (ATD/B:CT)

• Then: $68.96
• Now: $40.44
• Return: 17%
• Total return: 18%

ROYAL BANK (RY:CT)

• Then: $96.71
• Now: $108.20
• Return: 12%
• Total return: 16%

Total return average: 11%

FUND PROFILE

Goodreid North American Balanced

Goodreid’s balanced approach allows investors to participate in the potential growth of equity holdings while mitigating risk through ownership of quality fixed-income instruments.

Performance as of: Sep. 30, 2018

• 1 year: 3.0% fund, 3.9% index
• 3 years: 7.9% fund, 4.4% index
• 5 years: 6.7% fund, 4.1% index

INDEX: Morningstar Canadian Equity Balanced Category Average.
Returns are net of fees and include reinvested income.

TOP HOLDINGS

1. U.S. equities: 38%
2. Canadian equities: 29%
3. Canadian fixed income: 21%
4. Cash: 12%

WEBSITE: goodreid.com