Dec 10, 2018

Michael Sprung's Top Picks: Dec. 10, 2018

BNN Bloomberg

Michael Sprung , BNN Bloomberg

Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps

MARKET OUTLOOK

Investors have been extremely skittish as indicated by the capricious market reactions day to day. These reactions to current stimuli are typical of late-cycle behaviour. After nine years of recovery since the financial crisis, the market is being challenged by some underlying inequities that have been building over this extended period. Evidence is building that global economic growth is slowing. The synchronized global recovery is faltering as trade slows in response to tariffs and capital investment slackens in response to higher interest rates. Some emerging markets are seeing capital outflows as their currencies depreciate in response to the rising debt burden exacerbated by higher rates. In the developed markets, the central banks have been reducing stimulus.

The U.S. economy continues to benefit from the tailwinds of last year’s tax cuts and stock buybacks. But higher rates will soften the end demand for housing, consumer spending and business investment. Confidence is being shaken by the announcements of factory closings. Rising trade tensions between the U.S. and China are also a major concern.

Canada has been particularly impacted by low energy prices and government interventions that have not been conducive to promoting investment. Consumer spending has slowed and there’s been a pronounced decline in capital spending.

It’s possible that a soft landing still may be in the offing barring an all-out trade war, but the risks of a hard landing are building. This is not a market for short-term investors. Over the past few months, higher multiple growth stocks have exhibited greater vulnerability to negative market sentiment. Valuation is going to become a more important factor in security selection. As such, investors should have sufficient cash on hand to take advantage of opportunities as they arise.

UPDATES

Precision Drilling was sold for an account requiring tax loss.
We sold Aecon late November at $19.55, our average cost was $12.35.
In March, we sold a portion of our exposure to NFI Group at $58.60.
In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife and CAE and Suncor.
Sold Enercare on Aug. 1 at $28.87 when the Brookfield Infrastructure offer emerged.

TOP PICKS

CIBC (CM.TO)
Last purchase on Sep. 16, 2016 at $101.00.

CIBC is Canada’s fifth largest bank by market capitalization. Over the better part of the past decade, management has concentrated on de-risking and shoring up the balance sheet largely by retrenching and focusing on core competencies. The bank is consistently among the most profitable as measured by return on equity and has one of the strongest capital bases. Recently, the banks have pulled back from their highs. CIBC is selling at an attractive valuation and has a 5 per cent yield.

CANADIAN NATURAL RESOURCES (CNQ.TO)
Last purchase on Aug. 26, 2015 at $25.51.

Canadian Natural resources is one of Canada’s leading senior producers of oil and gas. CNQ is one of the best managed and best capitalized companies in the energy sector with a diversified base of long life, low decline and assets. This status affords the company a degree of resilience to the underlying commodity prices that few companies in the oil patch can match. In addition, CNQ has flexibility in its capital expenditure programs for mining, exploration and production and thermal projects. The problems of the energy sector are well known, but we believe that CNQ will weather the storm and emerge in a strong competitive position. At current prices, the stock yields 3.8 per cent.

ENBRIDGE (ENB.TO)
Last purchase on May 17, 2018 at $42.15.

Enbridge is a leading energy generation, distribution and transportation company in the U.S. and Canada. Its pipeline network includes the Canadian Mainline system, regional oil sands and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada’s largest natural gas distribution company. Additionally, Enbridge generates renewable and alternative energy, with 2,000 megawatts of capacity. Export pipe capacity is tight and Enbridge has the ability to supply some incremental relief through Mainline at modest capital cost. The company’s stepped-up asset monetization program has reduced leverage ahead of schedule. Enbridge has a highly contracted cash flow profile, financial flexibility and a secured $22 billion growth program. At current prices, the stock yields 6.3 per cent.