Brian Madden's Top Picks
Brian Madden, senior vice president and portfolio manager, at Goodreid Investment Counsel
FOCUS: Canadian equities
As we discussed on the show on January 7th our expectation is for value stocks to outperform growth stocks in 2021, given the trifecta of strong economic recovery, high valuations overall supported by accommodative central bank policy and wide disparity in the valuations of growth vs. value stocks.
The value/cyclicality trade began to assert itself around the time of the U.S. elections, and since that time Canadian value stocks have gained 28 per cent vs. a 10 per cent gain for growth stocks. Year to date Canadian value stocks are up 10 per cent while growth stocks have dropped one per cent.
We expect this trend to continue, particularly the cyclicality aspect of it, and have positioned accordingly for it in our portfolios which are overweight vs. the S&P TSX Composite in basic materials, consumer discretionary and financials and zero weighted in telecom, real estate and utilities. 2021 is shaping up to be a target rich environment for fundamental investors, with wide disparity in returns across sectors, as the top performing sector is outperforming the bottom sector by 44 per cent year to date and the equally weighted S&P TSX index is outperforming the market capitalization weighted index.
With some of last year’s pricey “work from home” market darlings just now beginning to show signs of cracks in their armour, success will hinge as much on what not to own as what to own.
NFI Group (NFI TSX) latest purchase March, 2021 @ $28.81
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 mix 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.
Franco Nevada (FNV TSX) latest purchase Feb, 2021 @ $140.90
Franco-Nevada is a resource royalty and investment company whose management team and founders pioneered the resource royalty concept over thirty years ago. The business model affords shareholders exposure to commodity prices via a royalty payment for each ounce produced (primarily, gold, silver and other precious metals and to a lesser extent, oil and gas and other metals) but insulates them from the operating and capital cost overruns that are endemic to the mining industry.
The business model also affords shareholders long term optionality on future discoveries on any of their royalty lands, across a portfolio of 398 royalties that is well diversified by commodity, by geography and by operator. Franco-Nevada has consistently and significantly outperformed its gold mining peer group, in nine of the last thirteen years since its initial public offering, on the strength of this superior business model.
Intact Financial (IFC TSX) latest purchase Mar, 2021 @ $147.30
With a 17 per cent market share, Intact Financial is the largest property and casualty insurer in Canada. Intact underwrites auto, home, commercial and specialty insurance policies and is best known for the efficiency of its operations and its consistent underwriting profitability which enables them to target a return on equity five per cent higher than its rivals and which currently stands at 18 per cent.
As a consolidator of the fragmented insurance market, Intact has grown earnings at a 13 per cent compound rate over the last five years and their pending $12B transformational acquisition of RSA Insurance will add a further five per cent to their domestic market share while putting them immediately on the map in the U.K. Long term macroeconomic forces like climate change and rising property values advantage Intact through higher policy premiums on higher insured property values and over the medium term a “hardening” (i.e. premiums are rising steadily) property and casualty insurance market is providing a significant tailwind to their financial results.
PAST PICKS: March 10, 2020
Parex Resources (PXT TSX)
- Then: $14.28
- Now: $23.63
- Return: 65%
- Total Return: 65%
TD Bank (TD TSX)
- Then: $60.20
- Now: $78.51
- Return: 30%
- Total Return: 37%
Open Text (OTEX TSX)
- Then: $54.17
- Now: $55.99
- Return: 3%
- Total Return: 5%
Total Return Average: 36%
Company Twitter Handle: @goodreidinvest
Company Website: http://www.goodreid.com