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

MARKET OUTLOOK

Many believe that stocks have recovered too far, too fast based on their assessment of the “Main Street” economy that is ubiquitous in everyday life. But Main Street is small business-centric and bears little resemblance to the S&P and TSX, which are multinational-centric. Moreover, the market prices stocks based on what they expect companies to earn 12 to 18 months from now, arguably an order of magnitude higher than current corporate profits. For better or worse, markets are mercenary. As citizens, we can lament the current public health crisis, but as investors we know the vaccines being distributed herald an impressive pending recovery in profits.

We foresee more cordial global trade relations as opposed to the tit-for-tat protectionist tariffs and trade wars presided over by the Trump administration, which we first warned about in February 2017. This will be a decidedly pro-global growth force that benefits large multinationals, American importers of foreign goods and households who ultimately have borne the cost of these tariffs. We expect ambitious, deficit-financed spending as well as a heavier regulatory hand in scapegoat industries like oil and coal under a Biden administration. With this aggressive fiscal stimulus we expect some upward pressure on longer-term bond yields as inflation fears pick up and as concerns about longer-term sovereign credit risk surface again as they did in 2011, and an attendant further weakening of the U.S. dollar. We believe the likelihood of value stocks outperforming growth stocks is high given the trifecta of an expected strong economic recovery, high valuations overall supported by central bank policy and wide disparity in the valuations of growth stocks versus value stocks.

TOP PICKS

Curaleaf Holdings (CURA CSE) latest purchase December, 2020 at $15.23.

Curaleaf Holdings is the world’s largest producer of marijuana as measured by sales. Operating entirely in the U.S. but listed in Canada, Curaleaf is vertically integrated with a presence in 23 states and 23 cultivation sites, 30 processing facilities and 96 dispensaries. The company is growing rapidly, both organically with many new dispensaries opened in recent quarters and with licenses to open a further 39 stores, as well as via the transformational acquisitions of Grassroots and Select last year. The company is leveraging its roots in medicinal and moving into recreational as more and more states legalize marijuana. Unlike in Canada, the U.S. market is undersupplied. Most importantly, unlike the vast majority of Canadian marijuana producers, Curaleaf has a sound strategy, a strong board and management team and excellent corporate governance and management-shareholder alignment.

Canada Goose (GOOS TSX) latest purchase December, 2020 at $39.84.

Canada Goose has traded publicly since 2017 but has been operating for 60 years and its CEO and a private equity firm own 46 per cent of the shares. The company has grown sales at a 33 per cent compound rate over the last three years as they expand geographically and grow their direct-to-consumer and e-commerce channels. By insourcing manufacturing and by shifting sales from third-party stores to their own channels, the company’s operating profit margins have been improving steadily. Unseasonal weather in key sales regions, reduced travel and tourism and the recent non-essential services lockdowns in Canada and Europe have brought about a 30 per cent pullback in the shares since late November and have afforded an attractive entry point into the stock, which trades at 30 times earnings versus its longer-term average of 40 times.

Parex Resources (PXT TSX) latest purchase December, 2020 at $17.99.

Parex is a mid-sized company producing approximately 47,000 barrels of oil per day in Colombia. Parex enjoys some of the highest netbacks (operating profits) of any mid- to large-sized Canadian energy producer. The company had grown production by 135 per cent since 2014 until curtailing exploration and some production amidst low oil prices early in 2020. Crucially (and refreshingly, for a resource company), the management team is very focused on profitability such that commensurate with its prolific growth in production earnings grew more than eight-fold between 2014 and 2019 and return on shareholders’ equity in 2019 topped 27 per cent. With no debt and $350 million in cash on their books, Parex is well positioned to weather even a prolonged period of low oil prices.

In November they announced increases to their previously throttled-back exploration program, bringing exploration and development spending back near 2019 levels and signalling that oil prices have recovered sufficiently enough for them to generate compelling economics on new well development even at current prices.

PAST PICKS: JAN. 9, 2020

Restaurant Brands International (QSR TSX) sold Dec. 15 at $79.80.

• Then: $82.14
• Now: $78.56
• Return: -4%
• Total Return: -1%

Methanex Corporation (MX TSX)

• Then: $49.82
• Now: $60.62
• Return: +22%
• Total Return: +23%

Canadian National Railway (CNR TSX)

• Then: $120.29
• Now: $142.88
• Return: +19%
• Total Return: +21%

Total Return Average: +14%