Bob McWhirter, president of Selective Asset Management
Focus: Canadian dividend and growth stocks
Our Canadian Dividend Fund had its third anniversary on June 30.
The Fund’s 39.19 per cent three-year cumulative return significantly outperformed the S&P/TSX Total Return Index’s 7.14 per cent return.
As measured by the Bloomberg Commodity Index, commodity prices peaked in 2008, bottomed in 2016 and have been down 69 per cent over the past nine years. Over the past three years, there has been a high correlation between lower commodity prices and the significant underperformance of the S&P/TSX versus the FTSE All World Stock Index.
The S&P/TSX underperformance may be on the verge of improvement.
Emerging market (EM) equity indices have broken a six-year downtrend that began in 2011. I believe this improvement reflects the better economic outlook for EM countries.
Since April 2016 oil has traded in a range of $40 to $56 and appears to have bottomed at $42 in mid-June 2017. John Murphy, a technical analyst at Stockcharts.com, believes that from a monthly and weekly technical perspective, “Commodity prices may be bottoming.”
If commodity prices (including oil) are bottoming, inflation is likely to rise. This will drive interest rates and bond yields higher, causing bond prices to go lower.
Canadian mining stocks typically do well during rising inflation, and Canadian bank stocks benefit from rising rates.
A positive indication of the breadth of the market’s advance is the Bloomberg cumulative advance/decline index (TRADCANY) for the NYSE securities hitting a new high. We believe equity prices will continue to rise over the coming year.
COGECO COMMUNICATIONS (CCA.TO) – Purchased at $80.40, $2.7 billion market cap
- Cogeco is the eighth largest cable operator in North America, operating in Canada under the Cogeco Connexion name in Quebec and Ontario, and in the United States under the Atlantic Broadband name.
- Cogeco is spending US$1.4 billion to buy the remainder of MetroCast that it does not own. Cogeco sees cable growth opportunity in the U.S. at six to seven per cent versus three per cent for its Canadian cable operations.
- It has a 2.1 per cent yield and a 10 per cent payout ratio on four quarters of trailing cash flow.
- Reported on July 13, 2017: Year-over-year earnings per share up 37 per cent, four per cent earnings surprise. Year-over-year free cash flow grew 113 per cent, year-over-year cash flow from operations grew 32 per cent. Free cash flow yield improved to 10.4 per cent (A-) versus 6.4 per cent (B+). ROE trailing: 20.5 per cent (A-). 12.9x trailing P/E versus 37 per cent year-over-year EPS growth gives a P/E to EPS growth ratio (peg) of 0.345 (B-). CFAF/Price 18.8 per cent (A-) versus 16.8 per cent last quarter.
WASTE CONNECTIONS (WCN.TO) – Purchased at $83.50, $22 billion market cap
- Waste Connections Inc. is a solid waste services company providing waste collection, transfer, disposal and recycling services in the United States and Canada.
- It has a 0.7 per cent yield, 10 per cent payout ratio on four quarters of trailing cash flow.
- To report earnings on July 25, 2017. Forecast: $0.69 versus $0.57 = +22 per cent.
- Reported April 26, 2017: Year-over-year sales per share up 79 per cent (A+), year-over-year earnings per share up 58 per cent, one per cent earnings surprise. Year-over-year free cash flow grew 77 per cent, year-over-year cash flow from operations grew 47 per cent, free cash flow yield improved to 3.4 per cent (C+) versus 2.5 per cent (C+), ROE: 8.9 per cent (C+). 14.2x enterprise value to trailing EBITDA versus 68 per cent year-over-year EBITDA growth = EV/EBITDA to EBITDA growth of 0.21 per cent (C+). CFAF/Price 5.5 per cent (C+) versus a year ago CFAF/Price of 5.4 per cent (C-). Year-over-year CFAF/Price change 0.5 per cent (C+).
WSP GLOBAL (WSP.TO) – Purchased at $53.56, $5.5 billion market cap
- WSP provides technical expertise and strategic advice to clients in the property & buildings, transportation & infrastructure, environment, industry, resources and power & energy sectors. WSP has approximately 36,000 employees in 500 offices in 40 countries.
- It has a 2.8 per cent yield and 36 per cent payout ratio on four quarters of trailing cash flow.
- To report earnings on Aug 9, 2017. Forecast: $0.65 versus $0.65 = unchanged.
- Reported May 10, 2017: Year-over-year sales per share up nine per cent, year-over-year earnings per share up 41 per cent, 10 per cent earnings surprise. Gross margin grew five per cent year over year, 18.8 per cent vs 17.8 per cent. Year-over-year free cash flow grew 61 per cent. Year-over-year cash flow grew 53 per cent. Free cash flow yield improved to 3.1 per cent (C+) versus 2.7 per cent (C+). ROE: 10.3 per cent on a four-quarter trailing basis (A+). 10.9x enterprise value to trailing EBITDA versus 25 per cent year-over-year EBITDA growth = EV/EBITDA to EBITDA growth of zero.
PAST PICKS: NOVEMBER 4, 2016
CAE INC. (CAE.TO)
- Then: $18.89
- Now: $22.38
- Return: +18.47%
- TR: +19.88%
- Then: $15.88
- Now: $17.38
- Return: +9.44%
- TR: +9.44%
MAGNA INTERNATIONAL (MG.TO)
- Then: $52.22
- Now: $60.70
- Return: +16.23%
- TR: +18.42%
TOTAL RETURN AVERAGE: +15.91%
FUND PROFILE: CANADIAN DIVIDEND FUND
PERFORMANCE AS OF JUNE 30, 2017:
- 1 month: Fund -0.84%, Index* -0.83%
- 1 year: Fund 12.79%, Index* 10.26%
- 3 years: Fund 39.19%, Index* 7.13%
* Index: S&P/TSX Total Return Index (TSXTR)
NOTE: 1 year return is 253 bp AHEAD of TSXTR. Three-year return is simple, cumulative (not compound) return for bot Fund and TSXTR.
TOP HOLDINGS AND WEIGHTINGS
- Waste Connections (WCN.TO): 4.7%
- New Flyer Industries (NFI.TO): 4.7%
- Martinrea (MRE.TO): 4.4%
- Dollarama (DOL.TO): 4.3%
- CAE (CAE.TO): 4.2%