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

MARKET OUTLOOK

Investing in a bull market is easy, but keeping a cool head and a steady hand when others around you are losing theirs is what differentiates successful investors from failed investors. We think there has been a lot of nervous, “newbie” amateur money sloshing around markets after a huge rally last year, with an epic 11-year bull market lulling people into thinking that investing is easy. The additional impetus of technology like robo-advisors and competition among discount brokers has driven the cost of trading down to effectively zero, which has enabled anyone with a cellphone to fancy themselves a Wall Street gunslinger.

We don’t know when or how the virus will be eradicated, but we expect it will, just as previous global pandemics. In order to be an equity investor, one needs to have an innately optimistic disposition. One needs to believe that companies will pay their staff, suppliers, banks, lenders and the taxman and that in the end, there will something left over for shareholders. We believe this and act accordingly because we are pragmatic optimists at Goodreid. In the current environment, that means we watch the prices and quotes flicker crazily on our screens, but we’re not compelled to engage with them and choose not to engage with them by trading unless it is advantageous to do so.

We’ve done this for decades. We’ve seen panicky markets come and go many times before. We don’t believe in the most dangerous phrase in finance: “this time it’s different”. This too shall pass and the prices we’re seeing this week will look very attractive a year from now.

TOP PICKS

PAREX RESOURCES (PXT TSX)
Latest purchase on March 2020 at $17.49.

Parex is a mid-sized oil producer operating in Colombia. It enjoys some of the highest operating margins of any mid- to large-sized Canadian energy producer. The company has more than tripled production since 2013 and ended 2019 producing over 54,000 barrels of oil per day. Crucially (and refreshingly, for a resource company) management is very focused on profitability, such that commensurate with its prolific growth in production earnings have grown 418 per cent since 2013 and the return on shareholders’ equity exceeds 20 per cent. With just $2 million of debt and $350 million in cash on its books, Parex is well-positioned to fund its capital program, enabling further production and cash flow growth. If commodity prices re-normalize, it could also aggressively buy back the stock after having already retired nearly 10 per cent of its shares in 2019.

TD BANK (TD TSX)
Latest purchase on March 2020 at $65.58.

TD is Canada’s second largest bank and also increasingly a force to be reckoned with in U.S. banking and brokerage services. TD earns a 15 per cent return on shareholder’s equity and has grown earnings per share at a 13 per cent rate over the last decade, with an industry-leading 10 per cent compound growth rate in its dividend over that period as well. With nearly 40 per cent of its revenues originating in the U.S., TD is well-diversified both by geography and by line of business. Trading at 8.5 times expected earnings, TD looks poised to continue its consistent pattern of outperforming the TSX, a feat that it along other big banks has accomplished in 19 of the last 25 years.

OPEN TEXT (OTEX TSX)
Latest purchase on March 2020 at $56.03.

Open Text is a cloud and site-based enterprise information management software and solutions company. With an installed base of over 100 million users across over 10,000 companies globally, three quarters of the company’s revenues are recurring, which affords them good sales visibility and very limited customer concentration risk. Open Text generates 95 per cent of its revenues outside of Canada, primarily in the U.S. and Europe. The current management team continues to prioritize acquisitions funded with their prolific free cash flow. Since 2014 it has deployed some $6.2 billion across numerous acquisitions. Over the last 20 years, Open Text has generated a compound annual return of 9.7 per cent, double what the TSX index has achieved and a marked improvement over the negative 20-year return of the aggregate TSX tech sector, proving decisively that “boring” tech can indeed be beautiful.

PAST PICKS: APRIL 11, 2019

RESTAURANT BRANDS INTERNATIONAL (QSR TSX)

• Then: $88.31
• Now: $72.20
• Return: -18%
• Total return: -16%

SUNCOR ENERGY (SU TSX)

• Then: $43.88
• Now: $27.74
• Return: -37%
• Total return: -34%

RIOCAN REIT (REI-U TSX)

• Then: $26.32
• Now: $25.07
• Return: -5%
• Total return: +1%

Total return average: -16%