Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel
Focus: Canadian equities, fixed income, preferred shares and customized asset allocation
Canadian stock markets as a whole have traded in a remarkably narrow range year-to-date, with volatility very contained at the index level and masking the fact that quite a lot has actually been going at the sector and stock levels. The TSX touched its intraday low point for the year at 15,164.73 last Wednesday and has advanced just over one per cent year-to-date as of May 23. The high point for the year was 15,943.09, touched briefly on February 21. Thus, much of the last three months we can characterize as a corrective phase within an ongoing bull market.
At the sector level, we saw the big banks take a breather in the wake of their impressive gains late last year, with most of them enduring roughly 10 per cent corrections after reporting Q1 results in late February. With bank earnings season kicking off again today, and with the stocks having retreated back to attractive valuations, renewed interest in this sector, pending good results, ought to underpin support for this important segment of the market. It should be noted that while investors, regulators and the media have paid a great deal of attention on the woes of beleaguered alternative mortgage lender Home Capital Group and separately, the measures taken by various levels of government to cool down overheated housing markets, we cannot and do not make the simplistic and incorrect leap of logic that this must finally be the canary in the coal mine that foretells of the impending doom awaiting Canadian banks.
The other crucial sector, energy, awaits news from OPEC as they meet in Vienna tomorrow, but with expectations running hot for at least a six-month, if not a nine-month, extension of the 1.8 million barrel output cuts OPEC first agreed to last fall, the cartel may need to act even more boldly to underpin support for oil prices at current levels. Natural gas, in the Canadian context especially, is oversupplied and so its future price path hinges on strong summer cooling demand, and on weather ultimately.
This tenuous geopolitical and weather-dependent support for energy may conspire to draw investor attention away from the sector and back towards financials and other non-resource cyclicals. We ourselves have been increasingly looking beyond these two important sectors, and outwards beyond our borders, even within our Canadian equity portfolios, investing in companies with visible growth prospects and dominant market positions in their industries, who are levered to improving growth prospects in the United States and around the world in areas as diverse as manufacturing, retailing and information technology.
While the tepid gains in the TSX index year-to-date may have left passive Canadian equity investors in ETFs underwhelmed, we note with enthusiasm the falling level of correlations between individual stocks and these shifts in sector leadership we’ve been seeing recently, as these are the hallmarks of a stock picker’s market where active managers can truly add value.
CCL INDUSTRIES (CCLb.TO) – Last purchased on May 19, 2017 at $301.00
CCL Industries is classified as a materials stock, but is really nothing like gold or base metals mining companies that populate their sector — it really ought better to be thought of as an industrial company focused on packaging, containers and labels that serves clientele across a number of sectors, most notably large multinationals in the consumer packaged goods space. CCL is experiencing mid to high single-digit organic growth, and bolsters this growth as a capable and proven serial acquirer of complementary businesses. They recently bought Innovia Group for roughly $1.1 billion in an acquisition which should be about 12 to 13 per cent accretive to their EPS, which has grown at a torrid 40 per cent pace per annum between 2012 and 2016.
CGI GROUP (GIBa.TO) – Last purchased on May 19, 2017 at $66.30
CGI Group is Canada’s largest information technology services firm providing systems integration, business process outsourcing and consulting solutions across a wide array of verticals, including government, banking, telecommunications, energy, utilities, manufacturing and retailing. The company is increasingly licensing its own portfolio of intellectual property in the course of client engagements, which has long-term favourable margin implications for the company. With a fairly new CEO (although a long-time veteran of the company), an underleveraged balance sheet and a long history of making highly accretive acquisitions, a series of small in-fill transactions or a larger transformational deal could add further fuel to their growth over the next year or two.
NEW FLYER INDUSTRIES (NFI.TO) – Last purchased on May 19, 2017 at $55.55
New Flyer Industries is North America’s leading manufacturer of public transit buses and luxury motor coaches. Founded in the 1930s, New Flyer has grown rapidly since its initial public offering in 2005. The company has a dominant position in what is now an oligopolistic industry and has proven itself as a capable consolidator via a series of acquisitions. Ninety per cent of their revenue comes from the United States, and much of it flows through municipal transit agencies, who in turn are funded federally and thus may stand to benefit from stepped-up infrastructure funding. With the balance sheet significantly deleveraged after their last acquisition, and with strong sales visibility given a large and growing order backlog, the company may turn its focus to returning capital to shareholders via dividend increases later this year.
PAST PICKS: AUGUST 29, 2016
ALIMENTATION COUCHE-TARD (ATDb.TO)
- Then: $67.63
- Now: $61.37
- Return: -9.25%
- TR: -8.88%
MAGNA INTERNATIONAL (MG.TO)
- Then: $52.59
- Now: $60.11
- Return: +14.29%
- TR: +16.44%
CCL INDUSTRIES (CCLb.TO)
- Then: $240.35
- Now: $303.11
- Return: +26.11%
- TR: +26.89%
TOTAL RETURN AVERAGE: +11.48%
FUND PROFILE: 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 31, 2017:
- 1 year: Fund* 11.4%, Index** 11.3%
- 3 years: Fund* 7.4%, Index** 4.9%
- 5 years: Fund* 9.9%, Index** 6.8%
* Returns include reinvested income and are net of fees
** Index: Globe Canadian Equity balanced peer average
TOP HOLDINGS AND WEIGHTINGS
- Candian equities: 34%
- U.S. equities: 37%
- Canadian fixed income: 24%
- Cash: 5%