Brian Madden's Top Picks: April 11, 2019

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

MARKET OUTLOOK

The S&P/TSX finished 2018 down 8.9 per cent in a total return basis. Fast forward ninety days and the index has gained 13.3 per cent. What gives?

Does time really heal all wounds? Maybe, but we think the lesson here is simple: don’t believe everything “Mr. Market” tells you. We know that fear will push market prices well below their theoretical fair value from time to time and greed will push market prices well above fair value from time to time. Fear and greed are alive and well, causing renewed volatility in both directions. 

As we’ve often advocated, resisting the urge to “just do something” is the hallmark of successful investors. Steady hands, even temperament and a proven process that is devoid of emotion will win the day more often than not. With that in mind, we made only minor tweaks to portfolios during the quarter, lightening up modestly on defensive/bond proxy stocks and adding slightly to the secular growth stocks and the cyclicals in our portfolios.

Looking ahead towards the remainder of the year we’ll be hard pressed to repeat the remarkable equity returns we saw in the first quarter, but we can see a path to an economic soft landing and with it fresh all-time highs on the Canadian and U.S. stock markets at some point. 

The Federal Reserve’s dramatic change in its monetary policy stance while not quite unprecedented was unusual and extremely noteworthy. It may indeed prove to have been quite prescient in staving off recession for a period of time. Nevertheless, we’ve been somewhat surprised by the swiftness of the recovery in stock prices, mostly because history shows us that after sharp declines in stocks like we saw last year, markets more often than not will re-test the lows they made in the initial decline before recovering for once and for all. That hasn’t happened and there’s nothing etched in stone to say that it must happen, but we’re on the alert for the possibility that it could.

TOP PICKS

RESTAURANT BRANDS INTERNATIONAL (QSR.TO)
Latest purchase in March 2019 at $88.98.

With $30 billion in system-wide sales across 25,000 restaurants in over 100 countries, Restaurant Brands is an established leader in the industry. 99.5 per cent of their stores are owned by franchisees, allowing for rapid growth with limited need for shareholder capital; this is why the company enjoys very high and rising return on shareholder’s equity. 

It recently returned the crucial Tim Hortons’ banner to positive same-store sales growth with a variety of marketing tactics (digital loyalty program, a kids menu, all-day breakfast, major store renovations). It’s also appointed a veteran Burger King executive to the top job. The company is poised to continue expanding store count internationally and growing same-store sales across all banners. 

The likelihood of additional acquisitions further bolstering their organic growth is very high, with the major shareholder 3G Capital being the world’s best-known leveraged buyout player in the consumer branded goods space.

SUNCOR (SU.TO)
Latest purchase in March 2019 at $46.19.

Suncor is Canada’s largest integrated oil company, and the longest running operator of oil sands assets in the country. With breakeven oil prices near $30, the company is currently generating a very healthy free cash flow.

Downstream integration via their ownership of four world class refineries and approximately 1750 gas stations has been very effective in insulating Suncor from the steep discounts other Western Canadian oil producers have recently suffered when selling heavy crude oil into captive American refining markets while relying on often overcrowded pipelines. With their final two major expansion projects, Fort Hills and Hebron now in production, Suncor’s capital expenditures fell 17% last year and should fall a further 2% this year, allowing them to maintain their established pattern of dividend increases, which have grown at a 12% compound rate the last five years, and providing optionality to step up the pace of their share buyback program.

RIOCAN REIT (REI_u.TO)
Latest purchase in March 2019 at $26.69.

RioCan is the largest commercial property REIT in Canada and owns 233 properties comprising 38.7 million square feet of leasable space. The company has a stable base of recurring rental income from primarily national, investment-grade creditworthy tenants and is an advantaged position with a deep development pipeline.

The company is methodically executing a portfolio high-grading strategy by disposing of $2 billion of non-core assets in secondary and tertiary communities in order to focus on Canada’s six largest metropolitan areas, where it’s increasingly seeing density intensification opportunities to re-purpose assets. This slow metamorphosis away from shopping malls and towards residential property has important re-rating implications. Over time, it should allow the units to re-rate towards the 2 to 3 per cent yield that residential REITs trade at versus its current 5.5 per cent yield.

PAST PICKS: APRIL 4, 2018

CGI (GIBa.TO)

• Then: $74.07
• Now: $92.55
• Return: 25%
• Total return: 25%

ROYAL BANK (RY.TO)

• Then: $97.59
• Now: $103.87
• Return: 6%
• Total return: 11%

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $56.88
• Now: $80.74
• Return: 42%
• Total return: 43%

Total return average: 26%

FUND PROFILE

Goodreid North American Balanced
Performance as of: March 29, 2019

• 1 year: 4.2% fund, 4.0% index
• 3 years: 7.4% fund, 5.9% index
• 5 years: 6.6% fund, 4.4% index

INDEX: Morningstar Canadian Equity Balanced Category Average.
Returns are based on reinvested dividends, net of fees and annualized.

TOP 4 HOLDINGS

1. U.S. equities: 37%
2. Canadian equities: 32%
3. Canadian fixed income: 19%
4. Cash: 12%

WEBSITE: https://www.goodreid.com/