Full episode: Market Call for Wednesday, December 2, 2020
Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel
FOCUS: Canadian stocks
The traditional Santa Claus rally started early this year with November posting a total return of 10.6 per cent for the S&P/TSX composite index, its second-highest November return in a century and its highest November return since 1931.
Global equity markets, including Canada are undeniably in the throes of a cyclical bull market. Nevertheless, we speak to many investors who remain nervous and some, no doubt, will now want to wait until a vaccine is distributed. Every investor has their own fears and emotional tendencies to deal with, but we know that awaiting perfectly calm waters and clear skies before venturing out into what admittedly can sometimes be scary and choppy seas usually exacts a high price on long-term portfolio returns. November is an excellent case in point, with those who sat out the month forgoing a return that exceeds a normal year’s worth of returns.
Looking ahead we see not a monolithic stock market but a market of stocks, some undervalued, some fairly valued and some overvalued. Our job and our well-established approach is to set our course for the horizon, methodically weeding out overvalued stocks and introducing new positions in undervalued stocks with visible catalysts. These increasingly look like best-of-breed cyclicals and certain financials, with the growth-over-value trade and the corollary “work-from-home” over the “back-to-work trade” tired and long in the tooth.
Bank of Nova Scotia (BNS TSX) latest purchase November at $64.39
Scotiabank is Canada’s third-largest bank and the most globally ambitious with a long-established footprint in Mexico, Latin America and the Caribbean. Scotiabank earns an 11.6 per cent return on shareholder’s equity on its current cyclically depressed earnings and has grown earnings per share at a 5 per cent compound rate over the 2008-20 cycle, with commensurate increases in its dividend. The company has the largest exposure to fast growing and “underbanked” emerging markets among the Big Six. After a flurry of acquisitions in 2018-19, Scotia is now pruning non-core smaller assets and is poised to harvest synergies and growth opportunities in the acquired assets. Trading at 11 times expected earnings and yielding 5.5 per cent, we see a logical and visible path to a double-digit return over a cycle in the shares of Scotiabank.
Manulife Financial (MFC TSX) latest purchase November at $22.12
Manulife is Canada’s largest life insurance company. The business is well balanced geographically, with roughly one-third of revenues coming from each of Canada, the U.S. and Asia. Manulife earns an 11 per cent return on shareholders’ equity, with structural tailwinds to that figure as they deemphasize and exit capital-heavy legacy businesses and invest relentlessly in technology to drive both internal efficiencies and superior and differentiated client experience. The stock yields 5 per cent and trades at 0.9 times book value, which is discounted both versus other Canadian life insurers and relative to its long-term average trading multiples. We expect this gap to close as macroeconomic forces normalize (i.e. interest rates bottom and mortality/morbidity experience laps the COVID-19 pandemic).
Alimentation Couche-Tard (ATD/B TSX) latest purchase November at $43.21
Couche-Tard is North America’s largest independent convenience store operator, with nearly 10,000 stores and a further 2,700 locations in Europe and a soon to be established foothold in Asia pending the closing of its acquisition of Convenience Retail Asia. The company earns returns on equity of 25 per cent and has grown earnings per share at a 23 per cemt 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 to 5 times 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. 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.
Past Picks: January 9, 2020
Restaurant Brands International (QSR TSX)
- Then: $82.14
- Now: $74.31
- Return: -10%
- Total Return: -7%
Methanex Corporation (MX TSX)
- Then: $49.82
- Now: $52.79
- Return: 6%
- Total Return: 7%
Canadian National Railway (CNR TSX)
- Then: $120.29
- Now: $137.34
- Return: 14%
- Total Return: 16%
Total Return Average: 5%