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

MARKET OUTLOOK

We head into December, one of the consistently strongest seasonal periods for stocks, with markets somewhat overbought in the short-term after a swift move eight per cent higher on the S&P/TSX Composite from the late August lows to the very recent highs. This tug of war between strong seasonality and somewhat overheated markets could resolve in either direction in the short-term. Over the medium-term we expect the rapid growth in corporate profits with TSX index earnings up 18 per cent year-over-year, and the strong economic fundamentals with Canadian GDP growing at plus three per cent clip to pull stock prices higher. Taking the long view though, we acknowledge that we are in the late stages of the current economic cycle, with the U.S. and Canadian expansions now entering their ninth year. The time will come, perhaps as soon as sometime in 2018, to position equity portfolios more defensively, reducing beta and cyclicality.

We will be closely watching a number of indicators, including the slope of the yield curve, employment growth, retail sales and purchasing manager indices, as well as market breadth and other sentiment measures to guide us in making this pivot. For the time being though, we await a number of potentially positive - although controversial - catalysts, including the passage of corporate tax cuts in the United States and the extension of the NAFTA trade treaty. We expect a lot of noisy back and forth and posturing on both of these files, but ultimately we expect success in both cases. Accordingly, our portfolios are tuned for an ongoing pro-growth environment. 

We maintain significant exposures to the banking and financial sectors as a leveraged play on domestic economic growth.  We own a number of durable goods exporters for exposure to the current globally synchronized economic expansion.  We also own select technology companies for their secular growth prospects.  We remain very much underinvested in bond proxies and interest rate sensitive trades, reflecting our view that central banks will remain on a steady course of tightening monetary policy over the medium term.

TOP PICKS

ROYAL BANK OF CANADA (RY.TO)
Royal Bank is Canada’s largest company, and one of the largest banks in the world. With a dominant domestic personal and commercial banking franchise, a top ten global capital markets business and the dominant Canadian wealth management franchise rounded out with smaller insurance and investor services/treasury businesses, Royal has a very solid and well-diversified earnings stream. Royal is also well-diversified by geography with large scale businesses in Canada, the United States, and Europe and in various other global financial centres. With a dividend yield of 3.6 per cent and with dividends growing at a six per cent compound annual rate over the last decade, we see a logical and highly visible path towards near double-digit returns in this stock over the course of the cycle. Last purchase November 2017 at $101.22.

INTER PIPELINE (IPL.TO)
Inter Pipeline operates a network of pipelines running 2.3 million barrels/day of diluted bitumen and condensate to and from Alberta’s major oil sands projects, as well as a smaller network of conventional oil pipelines in Alberta and Saskatchewan, various natural gas liquids processing plants in Alberta and numerous oil storage terminals in northern Europe. The company is poised to make a final investment decision on a propane dehydrogenation and polypropylene plant in the upcoming months, which would be among the first of its kind in Alberta, at a very opportune time when the province is awash with cheap propane. IPL yields 6.3 per cent and has grown its dividend steadily at a compound rate of seven per cent over the last decade, and should be able to continue to do so, as its business is 80 per cent underpinned by cost-of-service and fee-based long term contracts, ensuring very stable cash flows with limited commodity or volume risk. Last purchase November 2017 at $26.52.

POTASH CORP. (POT.TO)
Potash Corp. produces potash, phosphate and nitrogen for agricultural and chemical users globally. The company has operating assets in Canada, the United States and Trinidad as well as a number of minority interests in crop nutrient mines in Jordan, Israel, China and Chile. The company is on the cusp of a transformational merger with Agrium, which will diversify them into retail end markets in the United States, further diversify them into nitrogen nutrients, enhance the size and scale of the company and generate synergies of approximately $500M. The new entity should have mid-cycle earnings power roughly three times the currently depressed level of earnings in 2017, and thus is a compelling value opportunity and one that is well-positioned for a more balanced market in crop nutrients relative to today’s oversupplied conditions. Last purchase November 2017 at $24.66.

PAST PICKS: JANUARY 11, 2017

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $60.10
• Now: $65.67
• Return: 9.26%
• Total return: 9.76%

SHOPIFY (SHOP.TO)

• Then: $63.74
• Now: $133.89
• Return: 110.05%
• Total return: 110.05%

MANULIFE FINANCIAL (MFC.TO)

• Then: $24.88
• Now: $27.15
• Return: 9.14%
• Total return: 12.78%

TOTAL RETURN AVERAGE: 44.19%