Full episode: Market Call Tonight for Thursday, June 13, 2019
Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel
Focus: Canadian equities
Markets have been locked in a wide trading range since the end of 2017, with the TSX roughly flat over these past 18 months and the S&P 500 up a meagre 7 per cent. The tug-of-war in the market is anchored in the bullish camp by strong corporate profits, solid job creation and low interest rates; the bearish camp points to the elongated timespan of this economic cycle, the inverted yield curve, increasing populism/nationalism and the resultant geopolitical risks that flare up day-to-day.
Our approach is to diversify by asset class, by currency, by geography, by industry sector, by style and by investment theme (secular growth, cyclicals, bond proxies). Within the Canadian equity asset class, we favour secular growth businesses at present, as this affords us the luxury of not having to take a binary stance on when and how the next recession might unfold as we’d have to with a portfolio comprised entirely of cyclicals or bond proxies, both very macro-sensitive. Moreover, within a range-bound market, squeezing out a competitive return brings into focus two things: the importance of income (dividends) as an element of total return and the role of the active manager in selecting securities that outperform indexes or ETFs. Our view is that active managers earn their keep in challenging markets more so than in “shooting fish in a barrel” type markets. We’re resolved to do exactly that this year.
ROYAL BANK (RY.TO)
Latest purchase in June 2019 at $103.74.
With a dominant domestic 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, RBC has a very solid and well-diversified earnings stream. Royal is also well diversified by geography with businesses in Canada, the U.S., Europe and various other global financial centres. The bank is a leader in digital banking and in artificial intelligence and is using its scale to invest heavily in these drivers of long-term competitive advantage, with the goal of attracting by itself and affinity program partners an additional 2.5 million new Canadian banking clients by 2023. Meanwhile, with a dividend yield of 4 per cent and dividends growing at a 7 per cent compound annual rate (CAGR) over the last decade, we see a logical and highly visible path towards double-digit returns in this stock over a cycle.
Latest purchase in June 2019 at $42.29.
Dollarama has approximately 1,200 stores in Canada and plans to grow to 1,700 over the next several years. The company’s key competitive advantages include procurement and merchandising expertise, which allows them to price extremely sharply; expertise in securing high traffic locations at a reasonable expense; and operational efficiency within their stores and distribution centres. Growth requires very modest capital and is easily financed internally, such that the company generates nearly $600 million of annual free cash flow, much of which it returns to shareholders via dividends and share buybacks. Dollarama has grown earnings at a compound rate of 20 per cent over the last five years and should continue to grow at a low to mid-teens pace in the coming years. The company also has a joint venture in Central America with Dollar City, with the option to take a controlling interest early next year, which could further extend and accelerate their growth in faster-growing economies where modern retailing remains in its infancy.
CCL INDUSTRIES (CCLb.TO)
Latest purchase in June 2019 at $63.74.
CCL produces specialty labels and packaging for large multinational consumer packaged goods companies in the food, healthcare and personal care industries primarily and has some exposure to the automotive and electronics industries as well. The company is highly profitable, with a 19 per cent return on shareholders’ equity and has grown rapidly both organically and by consolidating the fragmented packaging industry. Earnings per share have grown tenfold over the last decade, yet the shares trade at a modest 22-times expected earnings. The company’s growth stalled about a year and a half ago amidst commodity input cost pressures and difficulties integrating their Innovia acquisition, but these challenges are now behind them and growth is re-accelerating.
PAST PICKS: JUNE 28, 2018
SUNCOR ENERGY (SU.TO)
- Then: $52.93
- Now: $41.31
- Return: -22%
- Total return: -19%
RIOCAN REIT (REI_u.TO)
- Then: $24.34
- Now: $26.85
- Return: 10%
- Total return: 16%
ROYAL BANK (RY.TO)
- Then: $98.82
- Now: $103.03
- Return: 4%
- Total return: 8%
Total return average: 2%
Goodreid North American Balanced
Goodreid’s balanced approach allows investors to participate in the potential growth of equity holdings while mitigating risk through ownership of quality fixed income instruments.
Performance as of March 29, 2019
- 1 year: 4.1% fund, 3.8% index
- 3 years: 7.3%fund, 5.9% index
- 5 years: 6.6% fund, 4.3% index
Index: Morningstar Canadian Equity Balanced Category Average. Figures include reinvested income and are net of fees.
- Canadian equities: 32%
- U.S. equities: 37%
- Canadian fixed income: 19%
- Cash: 12%