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

MARKET OUTLOOK

September has historically been a soft month for stock markets. After the breathtaking rally shares have seen these past five months, the initial tremors we saw in established leadership technology stocks last week could be a sign of heightening volatility. This comes as students and parents navigate the most anxiety-ridden back-to-school season most of us can recall and as we head into what promises to be a “lively” U.S. elections in November. An alternative theory holds that the recent weakness in tech stocks is the last gasp of exhaustion on an extremely crowded, long-in-the-tooth, one-way trade favouring expensive growth stalwarts with pandemic resilient business models. This will give way to a broadening in market leadership to include cyclicals and value stocks in sectors like industrials, financials, materials, energy, etc.  And finally, a third possibility is that the apparent cracks in the armour of tech leaders in recent days is nothing at all: there is barely a discernable blip on stock charts that are trending  steadily upwards and to the right in textbook bull market fashion. Candidly, we don’t know which theory will prevail, but are well positioned for any eventuality. We have well diversified, balanced portfolios holding gold, high-credit quality short to medium term corporate bonds and cash to weather market volatility should it arise. We value core, long-term holdings of secular growth companies should the status quo prevail and selective positions in attractively valued leaders within cyclical industries should the long, long awaited rotation from growth to value and cyclicals start to unfold.

TOP PICKS

Franco-Nevada Corp. (FNV TSX)
Latest purchase September, 2020 at $189.29.

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). It also 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 consistently and significantly outperformed its gold mining peer group in nine of the last twelve years since its initial public offering on the strength of this superior business model.

CGI Inc. (GIB/A TSX)
Latest purchase September, 2020 at $90.52.

CGI Group is Canada’s largest IT services firm, providing systems integration, business process outsourcing and consulting solutions across a wide array of verticals. These include government, banking, telecommunications, energy, utilities, manufacturing and retailing. The company is increasingly licensing its own intellectual property in client engagements, which has long-term favourable margin implications for the company. With an underleveraged balance sheet and a long history of making highly accretive acquisitions, a series of small in-fill transactions or a larger transformational deal could further fuel their growth.

Methanex Corp. (MX TSX)
Last test purchase September, 2020 at $29.53

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 and 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 prices are cyclically depressed amidst pandemic ravaged demand for transportation fuels, affording an opportune entry point into the stock with the shares trading at 1.4 times book value versus their 10-year average of 2.5 times.

PAST PICKS: SEPTEMBER 4, 2019

Open Text (OTEX TSX)

• Then: $53.36
• Now: $57.06
• Return: 7%
• Total Return: 9%

Canadian Natural Resources (CNQ TSX)
Sold March 31, 2020 at $18.58.

• Then: $31.32
• Now: $24.20
• Return: -23%
• Total Return: -17%

RioCan REIT (REI-U TSX)
Sold Jan 31, 2020 at $27.41.

• Then: $26.82
• Now: $14.71
• Return: -45%
• Total Return: -41%

Total Return Average: -16%

TWITTER: @goodreidinvest
WEBSITE: http://www.goodreid.com
LINKEDIN: Brian Madden