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

MARKET OUTLOOK

Stocks markets roared out of the gate in early January carrying forward momentum from 2019, which was the strongest year for Canadian stocks in a decade. But fears of a slowdown and the coronavirus epidemic have put stocks in reverse over the last two weeks.

We expect a good year for stocks in 2020 as the economic cycle has been extended, the Fed is accommodative and valuations are undemanding. However, 5 to 10 per cent corrections are a routine feature of major global markets, so we aren’t surprised to see markets unwinding some of the heady gains recently. We have taken advantage of strength in bonds and by extension relative strength in “bond proxy” stocks to take profits and redeploy the proceeds into better valued and more cyclical stocks.

The lesson from SARS, MERS and Ebola is that sentiment takes a brief hit during epidemics until the outbreak is contained and the episode fades from the collective consciousness of investors over a matter of weeks or months as economic and corporate fundamentals re-assert themselves. We expect the coronavirus outbreak will follow the same script.

TOP PICKS

ROYAL BANK (RY TSX)
Latest purchase in January 2020 at $105.89.

Royal Bank is Canada’s largest company and one of the 10 largest banks in the world. With a dominant domestic personal and commercial banking franchise, a top 10 global capital markets business and the leading Canadian wealth management franchise rounded out with smaller insurance and investor services/treasury businesses, Royal has a very solid earnings stream. It's also well-diversified by geography with large-scale businesses in Canada, the U.S., Europe and other global financial centres. The bank is a leader in digital banking and artificial intelligence and is using its scale to invest in these drivers of long-term competitive advantage with the goal of attracting with its affinity program partners an additional 2.5 million new Canadian banking clients by 2023. Meanwhile, with a dividend yield of 4 per cent that’s grown at an 8 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.

TFI INTERNATIONAL (TFII TSX)
Latest purchase in January 2020 at $44.21.

TFI International is one of North America’s largest trucking companies, specializing in truckload, less-than-truckload, logistics and “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 shareholder 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 have driven an 18 per cent compound growth rate in earnings per share over the last decade. Despite their rapid growth, TFI trades at a very modest 10.3 times forecasted earnings, approximately a 40-per-cent discount to its larger U.S. trucking peers.

SUNCOR ENERGY (SU TSX)
Latest purchase in January 2020 at $41.78.

Suncor is Canada’s largest integrated oil company, and the longest-running operator of oil sands assets in the country. These have a 31 year reserve life index and with breakeven oil near $30, the company generates very healthy free cash flow even at current crude prices. Downstream integration via their ownership of four world class refineries and approximately 1,750 gas stations has been very effective in insulating Suncor from the steep discounts other Western Canadian oil producers have recently suffered when selling heavy crude oil into captive American refining markets while relying on often overcrowded pipelines. Suncor’s dividend yield of 4.1 per cent is more than double the average dividend yield of 1.95 per cent it has offered since 2005. It’s overwhelmingly likely Suncor will increase the dividend when it reports Q4 earnings, continuing a 16-year string of annual increases.

PAST PICKS: FEB. 26, 2019

ROYAL BANK (RY TSX)

• Then: $102.64
• Now: $105.02
• Return: 2%
• Total return: 6%

HUDBAY MINERALS (HBM TSX)

• Then: $9.07
• Now: $4.10
• Return: -55%
• Total return: -55%

ENBRIDGE (ENB TSX)

• Then: $49.01
• Now: $54.48
• Return: 11%
• Total return: 16%

Total return average: -11%

FUND PROFILE

Goodreid North American Balanced
Performance as of Dec. 31, 2019

• 1 year: 14% fund, 14.4% index
• 3 years: 7.1% fund, 4.1% index
• 5 years: 6.7.% fund, 4.2% index

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

TOP HOLDINGS

1. U.S. equities: 38%
2. Canadian equities: 30%
3. Canadian fixed income: 19%
4. Cash: 13%

TWITTER: @goodreidinvest
WEBSITE: goodreid.com