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

FOCUS: Canadian stocks

MARKET OUTLOOK:

Canada is poised to post its strongest economic growth in 35 years this year, and not surprisingly, corporate earnings are growing rapidly, with S&P TSX Composite index earnings in 2021 forecast to surpass prior peaks by nearly 10 per cent. The S&P TSX Composite is the cheapest major global developed market equity index as measured by a basket of valuation metrics, including price to earnings, price to book, dividend yield, enterprise value to EBITDA and price to sales. With a roaring cyclical bull market in key export commodities and 73 per cent of the index comprised of cyclically sensitive companies in the financials, energy, materials, industrials and consumer discretionary sectors, not surprisingly, Canada with a 14 per cent year to date return also has the distinction of being the top performing developed country stock market in the world this year. For overseas investors, an extra kicker to that return comes from an appreciating currency, with the Canadian dollar the top performing G10 currency year to date, up six per cent against the U.S. dollar. These are the kinds of things strategic asset allocators at the helm of some of the world’s largest pools of capital take notice of, as we ourselves did early this year when we increased our exposure to Canadian equities, and we expect others to follow suit as the year unfolds.

TOP PICKS:

Manulife Financial (MFC TSX) latest purchase May, 2021 @ $25.06

Manulife is Canada’s largest life insurance company. The business is well balanced geographically, with roughly 1/3 of revenues coming from each of Canada, the U.S. and Asia. Manulife earns a 12 per cent return on shareholders’ equity, with structural tailwinds to that figure as they deemphasize and exit capital-heavy legacy businesses and invest relentlessly in technology to drive both internal efficiencies and superior and differentiated client experience. The stock yields 4.5 per cent and trades at 1.1x book value, which is discounted both vs. other Canadian life insurers and relative to its long term average trading multiples.  We expect this gap to close as macroeconomic forces normalize (i.e. interest rates bottom and mortality/morbidity experience laps the COVID-19 pandemic). 

Alimentation Couche-Tard (ATD/B TSX) latest purchase May, 2021 @ $44.31

Alimentation Couche-Tarde is North America’s largest independent convenience store operator with nearly 10,000 stores and a further 2,700 locations in Europe and 400 in Hong Kong & Macau. The company earns returns on equity of 24 per cent and has grown earnings per share at a 23 per cent compound rate over the last decade. The company uses procurement scale to price sharply on fuel, drawing traffic to their sites and then luring shoppers into attractive, modern, well merchandised stores where merchandise gross margins are 3-5x higher than their profit margin on gasoline.  The company is a very capable acquirer with a demonstrated pattern of realizing significant synergies from acquired businesses, in this still highly fragmented industry.  The growth algorithm is shifting towards more organic growth, with merchandising sophistication increasing and digital marketing and loyalty programs gaining traction. This acceleration of organic growth should over time earn a higher valuation.

Nutrien Ltd. (NTR TSX) latest purchase May, 2021 @ $73.82

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 multiyear highs, demand and pricing for fertilizer is very strong. 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 1.6x book value, illustrating the significant re-rating potential in the shares as fertilizer market conditions tighten. In the meantime, the shares yield three per cent and the company will likely soon resume it’s share buyback program, bolstering earnings growth.

PAST PICKS: June 11, 2020

Dollarama (DOL TSX)

• Then: $47.00
• Now: $52.79
• Return: 12%
• Total Return: 13%

Methanex (MX TSX)

• Then: $26.81
• Now: $43.87
• Return: 64%
• Total Return: 65%

Intact Financial (IFC TSX)

• Then: $130.18
• Now: $164.34
• Return: 26%
• Total Return: 29%

Total Return Average: 36%

Company Twitter Handle: @goodreidinvest

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

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