Brian Madden's Top Picks: Feb. 26, 2019

BNN Bloomberg

Brian Madden , BNN Bloomberg

Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel

Focus: Canadian equities

MARKET OUTLOOK

The Canadian stock market has recovered mightily, with a 16 per cent bounce off of the Christmas Eve low point with substantially all stocks participating in the rally (222 of 238 index constituents are up over that time frame). The character of the rally has been very much “risk on”, with the strongest gains, approaching 100 per cent in some cases, occurring in the marijuana sector followed closely by the gold mining group and the mining sector in general. It remains to be seen whether this rally is being driven by improved prospects for an economic soft landing, which we acknowledge has increased in likelihood following the dovish change in tone at the Federal Reserve in January, or simply by FOMO (fear of missing out) as investors scramble to re-risk portfolios after evacuating the stock market in droves in Q4 2018. Analysts are calling for TSX earnings to grow 17 per cent in 2019 vs. last year, although those growth forecasts have been pared back dramatically since the start of the year when growth forecasts stood at 24 per cent. Growth forecasts are also very back end loaded, with difficult year over year growth comparisons in Q1 and Q2 of this year. In our view, the best way to navigate this shifting but still uncertain economic environment remains via the ownership of a predominantly “best of breed” portfolio of stocks with representation across sectors and comprising a sensible, but not static, mix of cyclicals, secular growth stocks and defensive income plays.

TOP PICKS

HUDBAY MINERALS (HBM.TO)

Latest purchase in Feb. 2019 at $8.40.

Hudbay Minerals is a mid-sized base metals miner with three operating mines, including two in Manitoba and one in Peru. Hudbay also has a sizeable advanced stage development project in Arizona that is expected to receive its final operating permits later this year. After a string of financial and operational problems, as well as some legal and regulatory delays at its Rosemont property, activist investors took a 12 per cent stake in the firm late last fall and are gearing up for a proxy fight at the upcoming annual general meeting. The activists have seemingly jolted the management team to attention, as is evident by the better than expected financial and metallurgical results in their latest two quarters, as well as the the new mine and mill plan announced last week at their Lalor zinc, copper and gold mine in Manitoba. Hudbay is an inexpensive stock, trading at 0.8 times book value, with good leverage to rising copper and zinc prices. With several potential catalysts coming up, including receipt of the Rosemont mine permit and getting social license from local stakeholders to access and mine the high grade zones at their Constancia mine in Peru.

ENBRIDGE (ENB.TO)

Latest purchase in Feb. 2019 at $48.78.

Enbridge is the largest pipeline company in Canada. They are best known for their crown jewel asset the Mainline & Lakehead system, which carries roughly two-thirds 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. With a dividend yield of 6.1 per cent and plans for annual dividend increases of 10 per cent, Enbridge offers an attractive combination of current income and very secure and visible medium-term growth prospects.

ROYAL BANK OF CANADA (RY.TO)

Latest purchase in Feb. 2019 at $100.74.

Royal Bank is Canada’s largest company and one of the ten largest banks in the world. With a dominant domestic personal and commercial banking franchise, a top ten global capital markets business, the leading Canadian wealth management franchise rounded out with smaller insurance and investor services and treasury businesses, Royal has a very solid and well diversified earnings stream. Royal is also well diversified by geography with large scale businesses in Canada, the United States, and Europe in various other global financial centres. The bank is a leader in digital banking as well as in artificial intelligence and is using it’s scale to invest heavily behind these drivers of long-term competitive advantage with the goal of attracting, both by itself and with its’ affinity program partners, an additional 2.5 million new Canadian banking clients by 2023. Meanwhile, with a dividend yield of four per cent and with dividends growing at a seven per cent compound annual rate over the last decade, we see a logical and highly visible path towards double digit returns in this stock over a cycle.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
HBM	N	N	Y
ENB	N	N	Y
RY	N	N	Y

PAST PICKS: FEB. 22, 2018

NORTH WEST COMPANY (NWC.TO)

Then: $27.51
Now: $32.26
Return: 17%
Total return: 23%

INTER PIPELINE (IPL.TO)

Sold in Feb. 2019 at $21.10.

Then: $22.63
Now: $21.30
Return: -6%
Total return: 1%

TD BANK (TD.TO)

Then: $73.24
Now: $77.01
Return: 5%
Total return: 9%

Total return average: 11%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
NWC	N	N	Y
IPL	N	N	N
TD	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: Dec. 31/18