Full episode: Market Call Tonight for Thursday, October 10, 2019
Brian Madden, senior vice-president portfolio manager at Goodreid Investment Counsel
Focus: Canadian equities
The current impeachment turmoil may at the margin boost the earnings prospects for a few media outlets, but will almost certainly be much ado about nothing for the rest of the economy. Far too much is made by investors of the political drama of the day and not enough weight is given to the economic backdrop. What is important though is the ongoing tug-of-war between U.S. trade and rate policies.
Trade policy is having a negative effect on global and U.S. growth. We can see this in objective indicators as diverse as rail freight volumes, purchasing manager surveys, manufacturing capacity utilization and even overall job growth. The Fed has accordingly cut rates twice this year, and markets expect another cut before year-end. This has boosted prices of traditional safe havens like long government bonds and gold, both of which we have exposure to and benefit from falling rates.
At the opposite end of the spectrum have been the shares of energy producers, which we’ve been cautious to own, but we are increasingly confident that the private market values of many of Canada’s energy producers now exceed their share prices. We expect a catalyst to surface this value in the coming years, perhaps in tandem with a broader rotation out of growth/momentum and into value/cyclicals, which have seen some tentative stirrings of interest in recent weeks. Turning over unturned stones in the under-loved corners of the market affords us a better risk/reward proposition than chasing the narrow market leadership group of the day.
RESTAURANT BRANDS INTERNATIONAL (QSR:CT)
Latest purchase in October at $94.80.
With $32B in system-wide sales across 26,000 restaurants in over 100 countries, Restaurant Brands International is an established leader in their industry. 99.5 per cent of their stores are owned by franchisees, allowing for rapid growth in store count, system-wide sales, royalties and profits with limited need for shareholder capital.
Having returned the crucial Tim Horton’s banner to positive same-store sales growth recently with a variety of marketing tactics and recently appointing a veteran Burger King executive to the top job, the company is poised to continue expanding internationally and growing same-store sales across all banners. The likelihood of additional acquisitions further bolstering their organic growth is very high, as the major shareholder, 3G Capital, is the world’s best-known leveraged buyout player in the consumer space.
PAREX RESOURCES (PXT:CT)
Latest purchase in October at $19.23.
Parex is a mid-sized, rapidly growing oil producer operating in Colombia. The company has more than tripled production since 2013 and ended the second quarter producing over 52,300 barrels of oil per day. Crucially (and refreshingly for a resource company), the management team is very focused on profitability, such that commensurate with its prolific growth in production, earnings have grown 235 per cent since 2013 and the return on shareholders’ equity now exceeds 25 per cent. With a mere $2 million of debt and $318 million in cash on their books, Parex is well positioned to both fund their capital program and execute aggressively on their share buyback program, which has already retired 6 per cent of their shares during the first six months of 2019.
Latest purchase in October at $74.44.
Scotia is Canada’s third-largest and most globally ambitious bank, with a long-established footprint in Latin America and the Caribbean. It earns a 14.6-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, and 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 the purchase of Jarislowsky Fraser and MD Management. Trading at a 10-per-cent discount to its 10-year average multiple, with a price earnings ratio of just 10 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: OCT. 24, 2018
Sold Aug. 23 at $54.21.
- Then: $43.84
- Now: $56.22
- Return: 28%
- Total return: 33%
MANULIFE FINANCIAL (MFC:CT)
- Then: $20.17
- Now: $23.46
- Return: 16%
- Total return: 22%
NORTH WEST COMPANY (NWC:CT)
Sold March 28 at $28.19.
- Then: $28.16
- Now: $28.24
- Return: 0.3%
- Total Return: 5%
Total return average: 20%