Full episode: Market Call Tonight for Thursday, January 9, 2020
Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel
Focus: Canadian equities
The current bull market has been statistically long if we date it back to March 6, 2009, as most people do. But a good argument can be made that two mild bear markets punctuated the ongoing secular bull. The first occurred in 2011 from May to October, during which the S&P 500 fell 21.6 per cent. The second occurred in Q4/18 when the index fell 20.2 per cent. There’s nothing magical about a 20-per-cent drawdown, but it’s the standard threshold investors use to define a bear market. And while the clock has been reset twice during the last 11 years, this remains one of the most loathed and mistrusted bull markets in history. That’s good news, because the pervasive skepticism is a healthy contrarian indicator.
There are other reasons to remain optimistic about the economy and markets heading into 2020, like robust job creation and looser monetary policy from the Fed. Strong new housing demand in the U.S. and a stabilizing market in Canada are important for the ripple effects the sector creates in the economy as well as what it says about consumer confidence. Both countries are likely to boost their economies through fiscal stimulus, in the U.S. as it heads into an election year and in Canada as the Liberal minority government looks to maintain power.
Our portfolios are emphasizing cyclicality and value themes, as we anticipate a continuation of the economic cycle through 2020. We see no reason not to expect another triple-digit return for stocks between now and 2030, as this is in fact the norm.
RESTAURANT BRANDS INTERNATIONAL (QSR TSX)
Last purchased December, 2019 at $86.
With $32 billion in system-wide sales across 26,000 restaurants in over 100 countries, Restaurant Brands International is an established industry leader. Ninety-nine per cent of their stores are owned by franchisees, so the growth algorithm is very “capital-light,” allowing for rapid growth in store-count, sales, royalties and profits with limited need for shareholder capital. Although Tim Hortons has struggled to grow, Burger King and Popeye’s are experiencing tremendous growth thanks to menu innovations and rapid store-count increases. The likelihood of additional acquisitions further bolstering their organic growth is very high, as major shareholder 3G Capital is the world’s best-known leveraged buyout player in the consumer space.
METHANEX (MX TSX)
Last purchased December 2019 at $48.72.
Methanex is the world’s largest producer of methanol, with a 14-per-cent share of the global market. The company operates six production facilities in Canada, the U.S., Chile, Egypt, New Zealand and Trinidad and Tobago. Rare among commodity producers, Methanex generates prolific free cash flow through the cycle thanks to its efficient plants situated near abundant sources of low-cost natural gas feedstocks. These cash flows have funded a 9-per-cent compound dividend growth rate as well as buybacks over the past decade, with the share count decreasing 17 per cent over that period. Methanol prices are cyclically depressed, allowing for an opportune entry point, with shares trading at two times book value versus their 10-year average of 2.5 times and yielding 3.9 per cent versus an average yield of 2.7 per cent.
CN RAIL (CNR TSX)
Last purchased December 2019 at $119.97.
CN owns and operates a 20,000-mile railroad network that serves as the freight backbone of the continent, connecting important ports and population centres from the Pacific to the Atlantic and the Gulf of Mexico. As the railroad that pioneered “scheduled railroading,” CN’s operating mantras include cost control, productivity, high asset utilization and, increasingly, technology enablement. The result is a return on shareholders’ equity that has risen from 16 per cent to 24 per cent over the last decade and earnings per share which have grown at a 16-per-cent compound rate over that time frame. Trading at 18.5 times earnings and yielding 1.8 per cent, CN has outperformed the TSX in 17 out of 24 years since its IPO.
PAST PICKS: JAN. 9, 2019
SCOTIABANK (BNS TSX)
- Then: $70.47
- Now: $72.28
- Return: 3%
- Total return: 8%
BROOKFIELD ASSET MANAGEMENT (BAM/A TSX)
- Then: $40.79
- Now: $58.24
- Return: 43%
- Total return: 45%
PAREX RESOURCES (PXT TSX)
- Then: $17.57
- Now: $24.67
- Return: 40%
- Total return: 40%
Total return average: 31%
Goodreid North American Balanced
Performance as of Dec. 31, 2019.
- 1 year: 14.1% fund, 14.4% index
- 3 years: 7.1% fund, 4.1% index
- 5 years: 6.7% fund, 4.2% index
Figures include reinvested income and are net of fees.
Index: Morningstar Canadian Equity Balanced Category Average.
- Canadian equities: 30%
- U.S. equities: 38%
- Canadian fixed income: 19%
- Cash: 13%