MARKET OUTLOOK: 

Markets have moved into a mid-cycle, steady state growth phase that we expect will play out over the next several years.  Economic growth is robust, employment has almost fully recovered from the pandemic, wages are rising, housing is strong, retail sales are strong and industrial production is strong.  Fiscal stimulus is throttling back as we get into the back half of the year but remains very expansionary by historic standards and monetary policy remains ultra-loose.  

Valuations for Canadian stocks are above average at 2.2x book value vs. the 35 year average of 1.9x, but profitability as measured by return on shareholder equity is also above average at 11.5 per cent vs. the 35 year average of 10.5 per cent.  Thus stocks are neither over nor undervalued, but rather are fairly valued, and accordingly, prospective returns should be in line with historical averages in the high single digits going forward, but as always, opportunities abound for disciplined investors whose research processes can uncover mispriced stocks, sectors or themes.  


TOP PICKS

PAREX RESOURCES (PXT TSX)

Latest purchase July, 2021 @ $21.87: Parex is a mid-sized company producing approximately 48,000 barrels of oil per day in Columbia.  Parex enjoys some of the highest netbacks (operating margins) of any mid-to-large sized Canadian energy producer.  The company had grown production by 135 per cent since 2014 until curtailing exploration and some production amidst low oil prices early in 2020.  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 grew more than eight-fold between 2014-19 and the return on shareholders’ equity in 2019 topped 27 per cent.  With no debt and $370m in cash on their books, Parex is well positioned to continue their pattern of returning of cash to shareholders, something they have done prolifically the last three years, deploying over $550m to retire 20 per cent of their outstanding shares in the process accreting value to remaining shareholders.  Moreover, poised to earn record profits this year the company just last month initiated a 12.5 cent/quarter dividend such that the shares now also sport a 2.5 per cent dividend yield.

FRANCO NEVADA CORP (FNV TSX)

Latest purchase July, 2021 @ $181.82: Franco-Nevada is a resource royalty and investment company whose management team and founders pioneered the resource royalty concept over thirty years ago.  The business model affords shareholders exposure to commodity prices via a royalty payment for each ounce produced (primarily, gold, silver and other precious metals and to a lesser extent, oil and gas and other metals) but insulates them from the operating and capital cost overruns that are endemic to the mining industry.  The business model also affords shareholders long term optionality on future discoveries on any of their royalty lands, across a portfolio of 406 royalties that is well diversified by commodity, by geography and by operator.  Franco-Nevada has consistently and significantly outperformed its gold mining peer group, in nine of the last thirteen years since its initial public offering, on the strength of this superior business model.

TRANSONTINENTAL INC (TCL/A TSX)

Latest purchase July, 2021 @ $23.22: Transcontinental is Canada’s largest commercial printing company and is slowly transforming itself into a significant player in the flexible packaging industry as well via a series of large and small acquisitions since 2012.  The company has rationalized its network down to 26 modern, efficient printing plants and 12 packaging plants across North America and Latin America and earns a healthy return on shareholder equity of 14 per cent... a figure that should rise nicely as the cyclically depressed printing business recovers alongside the economy.  With a 3.6 per cent dividend yield, a long history of consistent dividend growth and with the shares trading at just 10x expected earnings, Transcontinental exemplifies quality, industry leadership, value and cyclicality… all attributes that we believe will find favour among investors this year.

Alimentation Couch-Tard (ATD/B TSX)

• Then: $46.23
• Now: $50.98
• Return: 10%
• Total Return: 11%

TFI International (TFII TSX)

• Then: $58.20
• Now: $139.24
• Return: 139% 
• Total Return: 141% 

Enbridge (ENB TSX)

• Then: $43.95
• Now: $50.02
• Return: 14%
• Total Return: 21%

Total Return Average: 58%