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

MARKET OUTLOOK

Election related uncertainty is dissipating, albeit not as promptly or congenially as some may have hoped for. A “Blue Wave” has been taken off the table and along with it the prospect of both higher corporate taxes and massive fiscal stimulus, which to some extent would have counteracted one another in terms of corporate profitability. We remain in the early innings of a cyclical recovery following the pandemic-induced recession. The good news is that the recession was in a sense artificially induced by health and safety considerations that prompted governments to invoke drastic economic lockdowns as opposed to deep structural imbalances in the economy. Recovery should thus be easier without these large imbalances characteristic of more typical recessions that can take a long time to clear. While the second (or third?) wave of COVID-19 infections is now rampant, the lockdowns to date are nowhere near as draconian as those imposed this spring and accordingly the economy continues to grow along with corporate earnings, which ultimately drive stock prices. We like best-of-breed cyclicals for exposure to this economic recovery as a complement to our core holdings of secular growth companies, some of which we’d classify as “work-from-home” beneficiaries or as having pandemic-resistant business models.

TOP PICKS

Curaleaf Holdings Inc (CURA CSE) latest purchase October, 2020 at $11.47

Curaleaf Holdings is the world’s largest producer of marijuana as measured by sales. Operating entirely in the U.S. but listed in Canada Curaleaf is vertically integrated, with a presence in 23 states, including 22 cultivation sites, 30 processing facilities and 93 dispensaries. The company is growing rapidly both organically, with many new dispensaries opened in recent quarters and with licenses to open a further 42 stores, as well as via the transformational acquisitions of Grassroots and Select earlier this year. The company is leveraging its roots in medicinal marijuana and moving into recreational as more and more states, including five more this week, legalize marijuana. Unlike the Canadian market which is oversupplied and where the regulated market is struggling to compete with the black market, the U.S. market is undersupplied. 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.

Intact Financial Corp (IFC TSX) latest purchase October, 2020 at $139.62

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 5 per cent higher than its rivals and which currently stands at 17 per cent. As a consolidator of the still-fragmented insurance market, Intact has grown earnings at a 10 per cent compound rate over the last five years and has made recent acquisitions of Frank Cowan Company and Guarantee Company of North America which should be meaningfully additive to their 2021 earnings. 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” property and casualty insurance market (premiums are rising steadily) is providing a significant tailwind to their financial results.

Franco Nevada Corp (FNV TSX) latest purchase October, 2020 at $178.14

Franco-Nevada is a resource royalty and investment company whose management team and founders pioneered the resource royalty concept over 30 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 396 royalties that is well diversified by commodity, by geography and by operator. Franco-Nevada has significantly outperformed its gold mining peer group in nine of the last 12 years since its initial public offering on the strength of this superior business model.

PAST PICKS: NOV. 13, 2019

Suncor Energy (SU TSX)

• Then: $42.24
• Now: $15.66
• Return: -63%
• Total Return: -60%

Dollarama (DOL TSX)

• Then: $46.38
• Now: $48.03
• Return: 4%
• Total Return: 4%

Enbridge (ENB TSX)

• Then: $51.37
• Now: $37.35
• Return: -27%
• Total Return:-21 %

Total Return Average: -26%