Second quarter earnings results are pouring in rapidly, and at the overall market level, when aggregated, the results are awful, with earnings down by double digit percentages thus far.  The silver lining is that results have generally been better than feared as analysts took a sharp knife to their earnings forecasts during the second quarter, slashing profit outlooks more drastically than at any time since at least 1985.  As always, there are winners and losers, both in the relative sense and in the absolute sense.  Technology stocks and gold miners continue to earn eye popping record profits, while banks and energy producers are suffering under the weight of loan loss provisions and low commodity prices, both recession induced.  Meanwhile, the major market averages have recovered swiftly from the bear market lows in March, although the market remains bifurcated with growth stocks charging higher and value stocks lagging significantly.  We continue to maintain a barbell approach in our portfolios, with the cornerstones of the portfolios being financially strong, long established, high quality profitable businesses with leadership positions within their industries and the periphery of the portfolio consisting of cyclically depressed stocks with leverage to the economic recovery but which are nevertheless financially resilient enough to survive a prolonged recovery period if a second wave of COVID-19 infections necessitate more lockdowns.

TOP PICKS

Alimentation Couche-Tard (ATD/B TSX) - Latest purchase: July, 2020 at $46.37

Alimentation Couche-Tarde 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 of 23 per cent and has grown earnings per share at a 23 per cent compound rate over the last decade.  The company uses procurement scale to price sharply on fuel, drawing traffic to their sites and then luring shoppers into attractive, modern, well merchandised stores where merchandise gross margins are 3-5x higher than their profit margin on gasoline.  The company is a very capable acquirer with a demonstrated pattern of realizing significant synergies from acquired businesses, in this still highly fragmented industry.  The growth algorithm is shifting towards more organic growth, with merchandising sophistication increasing and digital marketing and loyalty programs gaining traction.  This acceleration of organic growth should over time earn a higher valuation.

TFI International (TFII TSX) - Latest purchase: July, 2020 at $57.34

TFI International is one of North America’s largest trucking companies, specializing in truckload, less-than-truckload, logistics & “last mile” and package and courier services across Canada, the U.S. and Mexico.  While undoubtedly operating a cyclical business, TFI has migrated towards an “asset light” model, which has allowed them to earn higher returns on shareholders equity than their peers over a cycle.  The company is a capable and active consolidator of the fragmented trucking industry, having completed 80 acquisitions since 2008, which has driven an 18% compound growth rate in earnings per share over the last decade.  Despite their rapid growth, TFI trades at a very modest 16x 2020 forecasted earnings and a mere 11x our estimate of its earnings power in a stronger economic environment, which represents approximately a 25% discount to its larger U.S. trucking peers.

Enbridge Inc (ENB TSX) - Latest purchase: July, 2020 at $43.03

Enbridge is the largest pipeline company in Canada, best known for its crown jewel asset, the Mainline/Lakehead system, which carries roughly 2/3 of the oil produced in Western Canada to consumption markets.  Enbridge transports 22 per cent of all natural gas and transports 25 per cent of all oil production in North America.  These highly strategic assets offer excellent earnings visibility via long term service contracts that are largely free of any commodity price or volume risk.  It also owns a small renewable energy business and a large gas distribution utility in Ontario.  With a dividend yield of 7.5 per cent and plans for annual dividend increases of 8-10 per cent, Enbridge offers an attractive combination of current income and very secure and visible medium term growth prospects.
 

PAST PICKS

Alimentation Couche-Tard (ATD/B TSX) - *2:1 Stock Split: September 30, 2019

• Then: $82.37
• Now: $45.35
• Return: 10%
• Total Return: 11%

Canadian Natural Resources (CNQ TSX) - Sold: March 31, 2020 at $18.58

• Then: $31.54
• Now: $23.90
• Return: -24%
• Total Return: -19​

RioCan REIT (REI-U TSX) - Sold: Jan 31, 2020 at $27.41

• Then: $26.47
• Now: $15.00
• Return: -43%
• Total Return: -38%

Total Return Average: -15%​
 

Twitter: @goodreidinvest
Website: http://www.goodreid.com
LinkedIn: https://ca.linkedin.com/in/brianjmadden