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

MARKET OUTLOOK

Roughly half the S&P TSX Composite companies have reported first-quarter results during this earnings season, with numbers approximately in line with analyst forecasts in aggregate and with year-over-year growth back modestly in the black after a brief and shallow decline during the fourth quarter.  All eleven sectors and 78 per cent of all TSX Composite constituent stocks have risen year-to-date, but there have been many double-digit decliners at the stock level as well, particularly in the resource space, proving that even a very broadly bullish market environment can mete out harsh punishment to stocks that disappoint.

The recent rally in the bond market after the Federal Reserve took a more dovish stance on rates in January coupled with ongoing robust job creation and recently reinvigorated retail sales and housing starts here in Canada offer some assurance that the growth scare we saw late last year won’t morph into a full-blown recession this year or early next year.  Accordingly, our focus has been on adding quality secular growth stocks and selective cyclical stocks to portfolios to position for a further extension of this admittedly already very long economic expansion.  The corollary is that we have been reducing exposure to defensive/bond proxy stocks that sported high yields and low betas, which we had accumulated from mid-to-late 2017 through late 2018.

TOP PICKS

FINNING INTERNATIONAL (FTT.TO)
Latest purchase in May 2019 at $23.35.

Finning is the world’s largest Caterpillar heavy equipment dealer. It sells, rents and services equipment and engines to customers in mining, public works, energy, forestry, construction and other industries.  With an expansive network and footprint in Western Canada, South America and the U.K. and Ireland, Finning is geographically well diversified, with balanced exposure to different business cycles and industries in each geography.  Management is intensely focused on driving higher returns on invested capital and has pushed support and maintenance revenues from 30 per cent of sales to 52 per cent over the last decade, which serves both to reduce cyclicality and to lower the capital intensity of the business.  Overblown fears of recession, coupled with an operational stumble in rolling out ERP software in their South American unit which has temporarily depressed profits, have the shares trading well off their recent highs, setting up a compelling entry point.  Finning earns a 13 per cent and rising return on equity, offers a dividend which has grown at a 6 per cent annual rate over the past decade and currently yields 3.4 per cent, while trading at 13 times expected earnings.

INTACT FINANCIAL (IFC.TO)
Latest purchase in May 2019 at $109.28.

With an 18 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 5 per cent higher than its rivals and which currently stands at 13 per cent.  As a consolidator of the still-fragmented insurance market, Intact has grown earnings at a 9 per cent compound rate over the last five years and mostly recently made a foray into the U.S. with the purchase of specialty insurer One Beacon.  Macroeconomic forces like climate change risk, rising property values and rising interest rates all advantage Intact through higher policy premiums on higher insured property values and higher income earned on their insurance float. 

SCOTIABANK (BNS.TO)
Latest purchase in May 2019 at $73.71.

Scotiabank is Canada’s third-largest bank and the country’s most globally ambitious bank, with a long-established footprint in Mexico, Latin America, the Caribbean and Asia.  Scotiabank earns a 14.4 per cent return on shareholder’s equity and has grown earnings per share at a 6 per cent compound rate over the last five years, with commensurate increases in its dividend.  The company has the largest exposure to fast growing and “underbanked” emerging markets among the Big Six banks, and further has internal efficiency levers to pull in driving superior earnings growth over the next several years.  The bank has aggressively deployed capital recently with the $2.9 billion acquisition of BBVA’s Chilean bank as well as two other South American banking deals and two large asset management acquisitions here in Canada with the purchase of Jarislowsky Fraser and MD Management.  Trading at a 14 per cent discount to its 10-year average with a price earnings ratio of just 9.7 times expected earnings and yielding 4.8 per cent, Scotiabank is well poised to continue its consistent pattern of outperforming the TSX, a feat that it has accomplished in 17 of the last 25 years.

PAST PICKS: MAY 16, 2018

TD BANK (TD.TO)

• Then: $75.53
• Now: $75.10
• Return: -1%
• Total return: 3%

PAREX RESOURCES (PXT.TO)

• Then: $23.46
• Now: $21.70
• Return: -8%
• Total return: -8%

FINNING INTERNATIONAL (FTT.TO)

• Then: $33.24
• Now: $23.85
• Return: -28%
• Total return: -26%

Total return average: -10%

FUND PROFILE

Goodreid North American balanced
Performance as of: March 29, 2019

• 1 year: 4.1% fund, 3.8% index
• 3 years: 7.3% fund, 5.9% index
• 5 years: 6.6% fund, 4.3% index

INDEX: Morningstar Canadian Equity Balanced Category Average.
Returns are based on reinvested dividends, net of fees and annualized