Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel

Focus: Canadian equities, fixed income, preferred shares and customized asset allocation

Despite expectations to the contrary, the first quarter of the new U.S. presidential administration was empirically rather void of volatility. Stocks traded in very tight ranges for much of January and March on both sides of the border, so much so in fact that January was the second narrowest trading range for U.S. stocks during the last decade with just 2.5 per cent separating the high and low points for the S&P 500 during the month, and the fifth narrowest monthly trading range for Canadian stocks with just 2.3 per cent separating the high and low water marks for the TSX Composite during the month. As the deluge of fourth quarter earnings results were released in February, U.S. stocks surged, while Canadian stocks mostly just tread water. And as the quarter came to a close, the quiet calm investors felt in January set in again in March with Canadian stocks eking out a modest advance while U.S. stocks mostly tread water. Bonds for their part paid their coupons and mustered small gains in price as rates fell and credit spreads compressed, such that the FTSE TMX Universe bond index earned a total return of 1.1 per cent for the quarter, with corporate credit outperforming government bonds.

Investors would do well to remember though that volatility, much like the man in Monty Python and the Holy Grail, is “not dead yet,” but rather is merely subdued for the time being. It will return, and rest assured, many pundits will then proclaim “I told you so,” and will sound alarm bells over the state of American government and the inevitable calamitous end of the bull market. But none other than the Oracle of Omaha himself, Warren Buffett, in an interview on February 27, cautioned that “if you mix your politics with your investment decisions, you’re making a big mistake.” We concur and would view any such instances as buying opportunities, and reiterate our stance that the developed world, and Canada and the United States in particular, are on the cusp of an important secular regime change wherein the thrust of policy stimulus is transitioning away from monetary policy (low/negative interest rates, quantitative easing, etc.) and towards fiscal policy (tax cuts, infrastructure funding, etc.). It is certainly true that markets correct from time to time — mostly because sentiment runs hotter and faster than underlying fundamentals. We can actually see some of these corrections in sentiment occurring despite the backdrop of an equity market where the primary trend continues to be upwards. For instance, three of the major “Trump trades” (rising interest rates given an inflationary and pro-growth agenda, strength in bank stocks given the intent to roll back regulatory red tape, and weakness in the Mexican peso given the protectionist trade rhetoric) all showed signs of fading or reversing their initial moves in the first quarter. In light of the new government’s growing pains during their first few weeks in office and the difficulty they’ve had building consensus on issues like repealing Obamacare, these countertrend reversals are not surprising, but in no way do they negate the regime change which is occurring.

Closer to home, the Canadian economy is cranking out new jobs at a blazing pace with 110,000 new jobs created year-to-date, with the six months up until January 31 being the strongest six-month period for job creation in over a decade. Currency markets took some encouragement from this with the Canadian dollar strengthening roughly half a cent versus the greenback in Q1, but the Bank of Canada in contrast remains very much mired in cautious rhetoric given ongoing weakness in business investment and foreign trade, amplified by trade policy uncertainty south of the border. Accordingly, interest rate hikes in Canada are all but off the table for this year and likely for the first half of 2018 as well, even as the U.S. Federal Reserve hiked rates in mid-March and signalled the likelihood of several more increases in 2017. The federal government rolled out the budget in March with little fanfare as the budget was very much a status quo type of affair with little in the way of major changes to either tax or spending policy. Investors collectively may have breathed a sigh of relief on that front, as rumours had swirled incessantly in weeks leading up to the budget about the prospect of increases in the capital gains inclusion rates or changes to the dividend tax credits, which would have been investor-unfriendly had they been enacted.

While we are mindful of Buffett’s advice as noted above — not to mix politics with investment decision making — we too were pleased to see that nothing incrementally hostile to capital and investment was brought to bear on either those Canadian corporations in which we invest, or upon investors themselves, on whose behalf we invest. Capital in today’s day and age is highly mobile, and flows to places where it is welcomed and flees those jurisdictions where it is ransomed or taxed too highly, and in a troubling sign of the times for the Canadian oil patch, two foreign supermajor oil producers pulled up stakes and sold their Canadian oil-sands assets to domestic interests in blockbuster deals valued at $13 billion and $18 billion respectively. Whether this proves to be a contrarian buy signal for Canadian energy stocks, as strong assets are shaken out of weak hands, or instead is seen as a watershed moment for foreign investment in an industry that is increasingly burdened with rising royalties and carbon taxes, remains to be seen. Not surprisingly though, in light of this news as well as the pullback in both oil and natural gas prices this quarter and some of the logistical and pipeline constraints facing the Western Canadian energy industry, the energy sector was among the worst-performing segments of the Canadian market this quarter, with a dismal return of -6.2 per cent, second only to health care, which was dragged down 10.3 per cent mostly by former wunderkind, and now pariah, pharmaceutical company Valeant. At the other end of the spectrum, leadership was found in technology with the TSX tech sector up 6.9 per cent. South of the border, retailers like Kohls, Target, Signet, L Brands and Under Armour were among the worst-performing companies within the S&P 500 as online shopping increasingly displaces bricks-and-mortar retailing. Our approach in facing this disruptive secular change has for some time been to avoid investing in most mall-based retailers, and more recently has broadened out to include investments in Shopify which facilitates e-commerce for small and mid-size companies, and Fedex which delivers many of these online purchases. Conversely, leadership in the U.S. was also in technology, with the sector overall gaining 12.6 per cent, and with some of the 800 pound gorillas in the space like Apple, Facebook and Netflix rising 20 per cent or more. These observations are encouraging, and they underscore our unwavering belief that investing in companies with superior profitability and rapid growth, while being mindful of financial risk and valuation, is the most consistent way to grow and compound wealth for investors over time. Governments and central bankers and the policy concerns of the day will come and go, but these principles are timeless and we remain confident that in abiding by them, we will continue to successfully navigate both calm and turbulent markets.


CCL INDUSTRES (CCLb.TO) – Latest purchase March 29, 2017 at $289.56
CCL Industries is classified as a materials stock, but is really nothing like gold or base metals mining companies that populate their sector — it really ought to be thought of as an industrial company focused on packaging, containers and labels and serving clientele across a number of sectors, most notably large multinationals in the consumer packaged goods space. CCL is experiencing mid- to high single-digit organic growth, and bolsters this growth as a capable and proven serial acquirer of complementary businesses. They recently bought Innovia Group for roughly $1.1 billion in an acquisition which should be about 12 to 13 per cent accretive to their EPS, which has grown at a torrid 40 per cent pace per annum between 2012-16. 

CAMECO (CCO.TO) – Latest purchase March 23, 2017 at $14.70
Cameco is one of the world’s largest and lowest-cost producers of uranium. In early January, the Kazakhstan state-owned mining company, which occupies a place of prominence in the uranium business not unlike OPEC does in the oil market, by virtue of it producing 30 per cent of the world’s uranium, announced they were reducing production by 10 per cent, which tightened the supply of uranium to what have been very oversupplied global markets by three per cent. While the stock has moved higher, it is still demonstrably cheap at 1.1x  book value, as compared to its prior peak multiple of 3.5x in 2011 before the Fukushima nuclear disaster, and as compared with its 30-year average trading multiple of 2.1x. There are signs of supply discipline being brought back to the market by the market leader, which has been and should continue to be good for the pricing of uranium, and by extension for the profitability of Cameco.

NEW FLYER INDUSTRIES (NFI.TO) – Latest purchase March 28, 2017 at $48.31
New Flyer Industries is North America’s leading manufacturer of public transit buses and luxury motor coaches. Founded in the 1930s, New Flyer has grown rapidly since its initial public offering in 2005. The company has a dominant position in what is now an oligopolistic industry and has proven itself as a capable consolidator via a series acquisitions. Ninety per cent of their revenue originates in the United States, and much of it flows through municipal transit agencies, who in turn are funded federally and thus may stand to benefit from stepped-up infrastructure funding. With the balance sheet significantly deleveraged after their last acquisition, and with strong sales visibility given a large and growing order backlog, the company may turn its focus to returning capital to shareholders via dividend increases later this year.




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