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

MARKET OUTLOOK

Stock markets are in the midst of a routine correction after an impressive recovery off the December “mini bear market” lows. Not all asset classes are following the correction script though, with gold, the U.S. dollar and long-dated government bonds a bastion of strength lately. Portfolio construction is an important, but underappreciated aspect of managing money. The “hot stock” tips investors like to throw around attract much more attention than the underlying logic of how a security or asset class fit into a diversified portfolio.

Our portfolios are built upon three main asset classes: Canadian stocks, U.S. stocks and fixed income. Within the Canadian equity segment, we try to maintain balanced, although not fixed exposure to secular growth stocks, quality cyclicals and defensive or “bond proxy” businesses. Secular growth stocks are the all-season radials, cyclicals are the racing slick tires and bond proxies are the snow tires. We certainly don’t pretend to know whether the markets will be in sunny, rainy or snowy moods on any given day or quarter, but we know we’ll see all of these conditions often enough over a full cycle. The various sub-components of our portfolios will accordingly each have their moments to shine.

At the moment, leadership is in the defensive and bond proxy parts of the portfolio and cyclical stocks have been notable laggards, but we are mindful that this won’t last forever. We will be looking for occasions to add to deeply discounted quality cyclicals and pare back on pricey bond proxy holdings at some point.

TOP PICKS

ALIMENTATION COUCHE-TARD (ATDb.TO)
Last purchased in August 2019 at $81.37.

Couche-Tard is North America’s largest independent convenience store operator with nearly 10,000 stores and a further 2,700 locations in Europe. The company earns returns on equity in excess of 20 per cent and has grown earnings per share at a 24-per-cent compound rate over the last decade. Their business model uses procurement scale to price sharply on fuel, drawing traffic to their sites and then luring shoppers into attractive stores where merchandise gross margins are three to five times higher than their profit margin on gasoline. The company has also a demonstrated pattern of realizing significant synergies from acquired businesses in this highly fragmented industry. The growth algorithm is shifting towards more organic growth though, with merchandising sophistication increasing and digital marketing and loyalty programs gaining traction. This acceleration should over time earn a higher valuation in the markets.

CANADIAN NATURAL RESOURCES (CNQ.TO)
Last purchased in August 2019 at $31.50.

Canadian Natural Resources is the largest energy producer in Canada, with approximately 1.1 million barrels of oil equivalent production per day. Roughly 75 per cent of their output is crude and the remainder natural gas. The company has a 27.7 year reserve life index, meaning that their lands will not be depleted of hydrocarbons for nearly 28 years at current production rates, yet the shares trade at just 10.2-times expected earnings, which in ballpark terms means the current market price ascribes zero value to the final 17 years of proven and probable reserves. The marketplace hates Canadian oil right now, amidst serious but ultimately temporary problems. This overwhelmingly negative sentiment affords an excellent opportunity to buy a premier producer near record low valuations and while it yields 4.7 per cent, with a dividend that’s grown at a 2 per cent compound rate over the last five years. 

RIOCAN REIT (REI_u.TO)
Last purchased in August 2019 at $26.04.

RioCan is the largest commercial property REIT in Canada and owns 230 properties comprising 38.3 million square feet of leasable space, primarily in the country’s six largest metropolitan areas. The company has a stable base of recurring rental income from primarily national, investment-grade creditworthy tenants and is in an advantaged position with a deep development pipeline, much of which is already permitted, and much of which is zoned for mixed-use residential. Furthermore, the company is methodically executing a portfolio high grading strategy, by disposing of non-core assets in secondary and tertiary communities in order to focus on the six faster-growing and higher-income metro markets, where it is increasingly seeing density intensification opportunities to re-purpose assets by selling air rights or by building, for instance, high-rise condos above existing commercial properties. This slow metamorphosis of the company away from shopping malls and towards residential property has important re-rating implications and over time 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: AUG. 1, 2018

PAREX RESOURCES (PXT.TO)

• Then: $22.85
• Now: $20.36
• Return: -11%
• Total return: -11%

LOBLAW (L.TO)

• Then: $67.93
• Now: $69.32
• Return: 27%
• Total return: 29%

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

• Then: $54.27
• Now: $65.54
• Return: 21%
• Total return: 22%

Total return average: 13%

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 28, 2019

• 1 year: 3.0% fund, 3.3% index
• 3 years: 8.7% fund, 5.8% index
• 5 years: 6.3% fund, 4.2% index

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

TOP HOLDINGS

1. U.S. equities: 39%
2. Canadian equities: 32%
3. Canadian fixed income: 18%
4. Cash: 11%

WEBSITE: goodreid.com