Aug 1, 2018

Brian Madden's Top Picks: Aug. 1, 2018

BNN Bloomberg

Brian Madden , BNN Bloomberg

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

_______________________________________________________________

MARKET OUTLOOK

Canadian equity investors in recent weeks have been digesting the first wave of second-quarter financial results, which companies are now releasing. Earnings growth has been strong, with the aggregate earnings for companies reporting thus far clocking in some 20 per cent above the year-ago figure. Nevertheless, with roughly one-fourth of S&P/TSX index members having reported Q2 results thus far, it’s very clear that there are “haves” and “have nots,” with 26 companies having exceeded analysts’ earnings forecasts and 21 falling short. The “haves” are a diverse group of resource, industrial, real estate, consumer, media and technology companies. The “have nots” are largely resource companies, with a few utilities and one market darling technology name thrown into the mix.

The share price performance picture has been mixed so far this summer as well, with about half of TSX members showing gains this quarter and half declining in price. We believe a style shift is getting underway in the market, whereby the bulletproof and almost untouchable momentum leaders of the last several quarters are starting to show some chinks in their armour. Conversely, some of the laggards are starting to catch the eye of value buyers. Stocks like Aurora Cannabis, Canopy Growth, Interfor, Canfor, West Fraser Timber, Constellation Software, Canada Goose and Shopify would be examples of the former, whereas stocks like Arc Resources, Birchcliff Energy, Transalta, Advantage Oil & Gas, Precision Drilling, Winpak and Cogeco Communications would be examples of the latter. The strong resurgence in oil prices, coupled with renewed hopes for the long-awaited $40 billion liquefied natural gas (LNG) project being sanctioned on the Canadian west coast has brought about fresh interest in some of these stocks.

On the other side of the ledger, enthusiasm for some of the growth leaders of past quarters has been dampened by, among other factors, the upward creep in interest rates as the Bank of Canada once again raised its overnight rate in July. Valuations are fair-to-full across broad swaths of the stock market, most notably among these high-flying, high-multiple growth and momentum leaders, which tend to be more sensitive to interest rate or risk premium-driven increases in their cost of capital. For our part, we continue to seek and find compelling opportunities and undervalued stocks in quieter and less followed corners of the market, and as such our portfolios are always in a process of slow evolution, like a plant turning towards the sun: imperceptibly slow to the naked eye, but undeniably effective in its result.

TOP PICKS

PAREX RESOURCES (PXT.TO)
Latest purchase: July 2018 at $22.46.

Parex is a mid-sized, rapidly growing oil producer operating in Colombia. Parex enjoys some of the highest netbacks (operating profits) of any mid- to large-sized Canadian energy producer. The company has nearly tripled production since 2013, and expects to end 2019 producing 50,000 barrels of oil per day as they continue drilling out their Colombian land blocks. Crucially (and refreshingly, for a resource company) the management team is very focused on profitability, such that commensurate with its prolific growth in production, earnings have quadrupled and the return on shareholders’ equity in the latest quarter surged to 26 per cent. With zero debt and $300 million in cash on their books, and with mostly unhedged exposure to rising international oil prices, Parex is well positioned both to fund their capital program, enabling further organic production and cash flow growth, and to repurchase their own shares, which they recently began doing. Parex is expected to grow earnings per share by 64 per cent this year, yet trades at a very modest 10 times earnings. Management recently initiated a strategic review process to surface value, which could see the company sold to a larger player in the months ahead.

LOBLAW COMPANIES (L.TO)
Latest purchase: July 2018 at $68.63.

Loblaw Companies Limited is the largest retailer in Canada, with dominant corporate and franchised banners in both the supermarket and pharmacy retailing segments. The company also operates a smaller financial services business and holds a controlling stake in Choice Properties, Canada’s third largest real estate investment trust. Loblaw accelerated its organic growth rate with the transformational acquisition of Shoppers Drug Mart in 2014 and has recently integrated Shoppers’ Optimum loyalty program, which has 13.5 million members, with its own, allowing them better customer insights and enhancing their promotional effectiveness. The result has been margin improvement and market share gains versus their grocery rivals. With the shares trading at 14-times earnings, and having grown earnings at a 14 per cent compound rate over the last five years, the shares offer an excellent combination of value, growth and consistency.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
Latest purchase: July 2018 at $54.40.

Brookfield is one of the world’s foremost managers and operators of alternative assets, with deep expertise in sourcing transactions and surfacing value in long duration real assets like real estate, private equity, infrastructure, renewable energy and utilities. With significant assets in Canada, the U.S., the U.K., Australia, Brazil and India among other areas, the company has tremendous reach and geographic diversity and can source transactions globally. Brookfield’s size and scale allow them to field expert teams with deep operating experience in their respective industry verticals and geographic areas. Moreover, their financial strength and variety of funding sources afford them the advantage of being among the first calls sellers of world-class assets make when looking to consummate a transaction. Demand for alternative assets is outstripping demand for traditional stocks and bonds, as institutions like pension funds increase their allocations to these less efficient markets, which better match their long duration liabilities. Accordingly, Brookfield has been enjoying consistent and large inflows of assets.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
PXT	N	N	Y
L	N	N	Y
BAMa	N	N	Y

PAST PICKS: OCT. 18, 2017

ENBRIDGE (ENB.TO)

Then: $50.42
Now: $45.87
Return: -9%
Total return: -5%

SCOTIABANK (BNS.TO)

Then: $80.65
Now: $77.05
Return: -4%
Total return: -1%

CGI GROUP (GIBa.TO)

Then: $66.78
Now: $81.24
Return: 22%
Total return: 22%

Total return average: 5%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
ENB	N	N	Y
BNS	N	N	Y
GIBa	N	N	Y

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: June 30, 2018