Brian Madden's Top Picks: May 4, 2021

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

FOCUS: Canadian stocks

MARKET OUTLOOK:

First quarter earnings results are in full swing for Canadian companies, and against rock bottom comparisons from last year earnings growth is exceptionally robust, with the median company surpassing expectations by over five per cent and with earnings for the index as a group poised to grow nearly 80 per cent from Q1 2020 levels. Growth is broad based, across all sectors, with the only major points of differentiation occurring between sectors and stocks experiencing triple digit growth (energy, materials), double digit growth (most sectors) and single digit growth (staples, telecom). Against this backdrop, many stocks are making new 52-week highs daily, along with the S&P TSX index itself, and very few stocks (virtually none) are making new lows.

Devils advocates might point to rising interest rates as the fly in the ointment that could derail the rally, but with 10 year Canada bond yields a mere 1.5 per cent and just barely back to end of 2019 levels, we’re  unconvinced that this bull market is about to fizzle out. Similarly, with the S&P TSX Composite index trading at a fairly neutral multiple of 16.4x expected earnings vs. the 20 year average of 14.8x, and with liberally flowing fiscal stimulus soon poised to collide with pent up demand from newly vaccinated Canadians for the finer things in life that have been off limits for over a year, we don’t think prices are ahead of themselves despite the phenomenal recovery in share prices this past year.

TOP PICKS:

Curaleaf Holdings (CURA CSE) latest purchase April, 2021 @ $16.59

Curaleaf Holdings is the world’s largest producer of marijuana, as measured by sales. Operating entirely in the United States and in Europe but listed in Canada, Curaleaf is vertically integrated with a presence in 23 states and five western European countries, including 24 cultivation sites, 30 processing facilities and 106 dispensaries. The company is growing rapidly, both organically with many new dispensaries opened in recent quarters and with licenses to open a further 29 stores, as well as via acquisitions. The company is leveraging its roots in medicinal marijuana and moving into recreational marijuana as more and more states, including five more in November via ballot initiatives in the U.S. election, legalize marijuana. Unlike the Canadian market which is oversupplied and where the regulated market is struggling to compete with the black market, the United States market is undersupplied. And perhaps most importantly, unlike the vast majority of Canadian marijuana producers, Curaleaf has a sound strategy, a strong board and management team and excellent corporate governance and management-shareholder alignment.

Laurentian Bank (LB TSX) latest purchase April, 2021 @ $40.11

Laurentian Bank is a Quebec based regional bank that is branching out in measured steps across the country and into the U.S.  Since last fall, under the new leadership of Rania Llewellyn, the first female CEO of a major Canadian bank,  the company has overhauled the executive team and is developing a new strategic plan that we expect will address productivity gaps with the larger banks in their core deposit and loan business, better develop their fledgling capital markets business and identify new growth opportunities while preserving their strong underwriting practices and relationship banking roots with personal and commercial clients.  Trading at 0.8x book value vs. bank peers that trade at a median price to book ratio of 1.6x, Laurentian Bank is the clear value/turnaround opportunity in Canadian banking.

Methanex (MX TSX) latest purchase April, 2021 @ $45.89

With a 14 per cent share of the global market, Methanex is the world’s largest producer of methanol, a product used in fuel blending and in plastics and other chemical applications. The company operates six production facilities in Canada, the U.S., Chile, Egypt, New Zealand and Trinidad & Tobago. Rare among commodity producers, Methanex generates prolific free cash flow through the cycle, thanks to its efficient plants situated near abundant sources of low cost natural gas feedstock. Methanol demand and pricing is roaring back from last year’s cyclical trough, and Methanex earnings which grew 970 per cent year over year in Q1 are roaring back alongside the commodity. Although the shares have also recovered sharply, they trade at a modest 2.2x book value vs. their ten year average of 2.5x and well below prior cycle peaks above 4x.

PAST PICKS: May 1, 2020

Canadian National Railway (CNR TSX)

• Then: $113.22
• Now: $133.36
• Return: 18%
• Total Return: 20%

Brookfield Asset Management (BAM/A TSX)

• Then: $46.14
• Now: $55.61
• Return: 21%
• Total Return: 22%

Open Text (OTEX TSX)

• Then: $53.33
• Now: $58.27
• Return: 9%
• Total Return: 11%

Total Return Average: 18%

Company Twitter Handle: @goodreidinvest

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

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