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

FOCUS: Canadian stocks

MARKET OUTLOOK:

With the transition of presidential power complete, investors can breathe a sigh of relief knowing that an endless string of nonsensical tweets are unlikely to roil markets as they did over the preceding four years and can return their focus to macroeconomic and company specific fundamental analysis. Not all are doing so, however, with retail investors in particular creating a sideshow circus in heavily shorted stocks, penny stocks and other speculative areas of the market in recent weeks. While entertaining, this has zero bearing on our own investment approach. We focus on owning durable businesses as opposed to trading and fixating upon shiny objects, which seems to be the modus operandi of the short attention span Reddit and Wall Street Bets crowd. We are encouraged by what we are seeing year to date in the macroeconomic landscape, with continuing recovery in retail sales, purchasing manager indices and personal income and ongoing strength in housing activity. Amidst this backdrop, the first trickle of Q4 2020 earnings results are generally coming in strong and with favourable outlooks for fiscal 2021, for the most part, validating our expectations for a robust economic recovery this year and continuation of the now 11-month-old bull market.

TOP PICKS:

Royal Bank of Canada (RY TSX) latest purchase Jan, 2021 @ $103.77

Royal Bank is 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 and the leading Canadian wealth management franchise rounded out with smaller insurance and investor services/treasury businesses, Royal has a very solid and well diversified earnings stream. Royal is well diversified by geography with large scale businesses in Canada, the U.S. and Europe and in various other global financial centres. The bank is a leader in digital banking and in AI and is using its scale to invest heavily in these drivers of long term competitive advantage, with the goal of attracting, by itself and with its’ affinity partners, an additional 2.5m new Canadian banking clients by 2023. With a dividend yield of 4.1 per cent and with dividends growing at an 8 per cent annual rate over the last decade, we see a highly visible path to sustainable double digit returns, particularly as the OSFI restrictions on dividend increases are lifted.

Nutrien (NTR TSX) latest purchase Jan, 2021 @ $63.25

Nutrien is Canada’s second largest mining company and is among the largest agri-businesses in the world, with wholesale potash, nitrogen and phosphates businesses integrated with a downstream retail farm supply network. With prices for key cash crops like corn, wheat and soybeans rising to five year highs, demand and pricing for fertilizer is very strong as we approach the spring planting season in North America. Nutrien, meanwhile has been expanding its retail network via a series of small acquisitions both within their traditional North American stronghold as well as in Australia and South America, which reduces both the commodity cyclicality of the business and the Northern hemisphere planting/harvest cycle seasonality. The two predecessor companies that merged to form Nutrien in 2018 traded on average at 2.9 and 2.4x book value whereas Nutrien currently commands a multiple of just 1.3x book value, illustrating the significant re-rating potential in the shares as fertilizer market conditions tighten. In the meantime, the shares yield 3.5 per cent and the company will likely soon resume it’s share buyback program, bolstering earnings growth.

OpenText (OTEX TSX) latest purchase Jan, 2021 @ $57.46

Open Text is a cloud and site-based enterprise information management software and solutions company. With an installed base of 100 million plus users across over 10,000 companies globally, nearly 90 per cent of the company’s revenues are recurring, which affords them good sales visibility and very limited customer concentration risk. Open Text generates 95 per cent of its revenues outside of Canada, primarily in the United States and Europe. The current management team continues to prioritize acquisitions, funded with their prolific free cash flow and since 2010 has deployed some $6.8B across numerous acquisitions. Over the last 20 years, Open Text has generated a compound annual return of 12.4 per cent, more than double what the TSX index has achieved and well ahead of the negative 20 year return of the aggregate TSX tech sector, proving decisively that “boring” tech can indeed be beautiful.

PAST PICKS: February 3, 2020

Royal Bank of Canada (RY TSX)

• Then: $104.76
• Now: $105.36
• Return: +0.5%
• Total Return: +5%

TFI International (TFII TSX)

• Then: $42.45
• Now: $89.30
• Return: +110%
• Total Return: +115%

Suncor Energy (SU TSX)

• Then: $40.03
• Now: $22.08
• Return: -45%
• Total Return: -43%

Total Return Average: +26%

Company Twitter handle: @goodreidinvest

Company website: http://www.goodreid.com

Other: https://ca.linkedin.com/in/brianjmadden