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

FOCUS: Canadian equities

MARKET OUTLOOK:

A favourite obsession among investors lately seems to be worrying about when the next market crash will inevitably occur. Not soon, in our assessment. We see scant evidence of either a cyclical recession, brought about by inventory de-stocking or aggressive monetary tightening or a structural recession, precipitated by economic imbalances and unproductive overinvestment in one or more major areas of the real economy.

The Fed and Bank of Canada have signalled loudly and clearly that the current lofty inflation rate is transient and accordingly interest rate hikes are not imminent. Both professional economists and interest rate derivative traders agree, with no more than one rate hike priced in between now and the end of next year. The U.S. manufacturing inventory to sales ratio is within a hair’s breadth of a twenty-year low, and stories of supply chain problems, commodity shortages, tight shipping markets and even labour shortages are rampant.  Warehouses are clearly too empty, not too full. 

Similarly, we’re hard pressed to pinpoint areas of obvious overinvestment akin to the Canadian oil sands 10-15 years ago, U.S. housing markets 15 years ago, or global telecom and technology infrastructure 20-25 years ago. What we’re left with is the conclusion that economic growth and share price gains will continue, absent an exogenous shock that triggers another event driven recession. Certainly, markets will move upwards in a saw-tooth pattern, as they usually do, with advances, followed by corrections, followed by further advances.  This is neither a time to be greedy, nor a time to be fearful. Markets are approaching a mid-cycle, steady state growth phase that we expect will play out over the next several years. 

TOP PICKS:

TD Bank (TD TSX) latest purchase June, 2021 @ $87.07

TD is Canada’s second largest bank and is also increasingly a force to be reckoned with in U.S. banking and brokerage services. TD earns a 14 per cent return on shareholder’s equity and has grown earnings per share at an eight per cent rate over the last decade, with a more than commensurate increase in its dividend as the firm has remained well capitalized through the cycle and remains the best-capitalized major Canadian bank today. The recent merger of their TD Ameritrade affiliate with The Charles Schwab Corp. promises to unlock $2B of synergies in the coming years. With nearly 40 per cent of its revenues now originating in the United States, TD benefits from geographic diversification and has a leading banking franchise along the U.S. east coast, which we’d expect them to opportunistically expand via acquisition. Alternatively, absent strategic and accretive acquisition opportunities presenting themselves, once regulators allow them to do so, TD has a war chest of capital at its disposal to buy back shares and increase dividends, boosting the current 3.6 per cent yield on its shares. 

SNC-Lavalin (SNC TSX) latest purchase June, 2021 @ $33.04

SNC Lavalin provides engineering, design, procurement, and project management services, serving clients in the nuclear energy, natural resource and infrastructure sectors, among others. A unique differentiator for SNC relative to its rivals is its’ principal investments portfolio, which allows it to co-invest in infrastructure projects alongside its clients, with the largest and most notable example being the 407 toll road north of Toronto. Under entirely new leadership the last few years, the company has moved to de-risk its business model, and is running off troublesome fixed price contracts quickly, and is divesting its oil and gas business. With a $13.2B project backlog and with governments increasingly earmarking funds for civic infrastructure renewal, we foresee strong earnings growth ahead and view the shares as reasonably priced, trading at 18x 2021 expected earnings. 

NFI Group (NFI TSX) latest purchase June, 2021 @ $28.00

NFI Group is the leading supplier of internal combustion engine and zero emission transit buses to cities, states and provinces in North America and has a strong and growing presence in the U.K. and Europe as well via their recent acquisition of Alexander Dennis Ltd.  Smaller motor coach and aftermarket parts and service segments round out the business alongside a fledgling but rapidly growing infrastructure solutions (i.e. EV charging systems) opportunity. Earnings are cyclically depressed, but poised to grow, potentially up to five fold between 2021-25 as demand recovers from the recession, bolstered by massive and secular global forces unleashed and funded by governments to catalyze a replacement cycle with zero emission buses displacing the legacy fleet. A $67M internal efficiency initiative and significant operating leverage to recovering volumes should drive strong earnings growth in the year ahead and rapid fire design innovation should rebuild the order backlog during the upcoming generational fleet refresh cycle.

PAST PICKS: July 7, 2020

TD Bank (TD TSX)

• Then: $60.22
• Now: $86.92
• Return:  44%
• Total Return: 51%

Parex Resources (PXT TSX)

• Then: $16.61
• Now: $21.10
• Return: 27%
• Total Return: 27%

Restaurant Brands International (QSR TSX) sold Dec, 2020 @ $87.07

• Then: $74.32
• Now: $79.78
• Return: 7%
• Total Return: 11%

Total Return Average: 30%

Company Twitter Handle: @goodreidinvest

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

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