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

MARKET OUTLOOK

Economic growth is slowing and with it, corporate earnings growth. Canadian cyclicals, with the exception of gold stocks, have been left for dead, affording value-oriented and income-seeking investors a compelling opportunity, provided that they are patient. Gold stocks are universally loved with the group up a whopping 49.2 per cent year-to-date, with 20 of the 21 constituents in positive territory, a far cry from this same time last year when the group was down 20 per cent year-to-date and with just four of the group constituents showing gains.

Elsewhere, it’s a good stock-picker’s market, with massive dispersion in returns between stocks and groups. For instance, the best-performing 20 per cent of TSX index constituents are up at least 32 per cent year-to-date and as much as 209 per cent in the case of Eldorado Gold, the index’s top-performing stock. Conversely the worst performing 20 per cent of TSX constituents are down at least 11 per cent and as much as 76 per cent in the case of Turquoise Hill Resources, the worst-performing stock. Our recent portfolio changes have endeavoured to add more secular growth stocks, while selling select cyclical companies for which the outlook has darkened and taking profits in defensive, bond-proxy companies that have traded up in some cases to very high valuations in sympathy with falling global bond yields.

TOP PICKS

OPEN TEXT (OTEX:CT)
Latest purchase in August 2019 at $51.95.

Open Text is a cloud and site-based enterprise information management software and solutions company. With a massive installed base of over 100 million users across over 10,000 companies globally, three quarters of the company’s revenues are recurring, which affords them good sales visibility and very limited customer concentration risk.

Open Text generates 95 per cent of its revenues outside of Canada, primarily in the U.S. and Europe. The current management team continues to prioritize acquisitions, funded with their prolific free cash flow. Over its history, the company has deployed some $6.2 billion across numerous acquisitions. Over the last 20 years, Open Text has generated a compound annual return of 13.5 per cent, double what the TSX has achieved and a marked improvement over the negative 20-year return of the aggregate TSX tech sector, proving decisively that “boring” tech can indeed be beautiful.

CANADIAN NATURAL RESOURCES (CNQ:CT)
Latest purchase in August 2019 at $31.40.

Canadian Natural Resources is the largest energy producer in Canada, with approximately 1.1 million barrels of oil equivalent production per day, with roughly 75 per cent of their output crude oil and the remainder natural gas. The company has a 27.7-year reserve life index, yet the shares trade at just 10-times expected earnings, which roughly means the market price ascribes zero value to the final 18 years of proven and probable reserves. The marketplace hates Canadian oil right now amid serious but ultimately temporary problems. This overwhelmingly negative sentiment affords an excellent opportunity to buy a premier producer near record-low valuations and while it yields 4.8 per cent with a dividend that has grown at an 11-per-cent compound rate over the last five years.

RIOCAN REIT (REI-U:CT)
Latest purchase in August 2019 at $26.77.

RioCan is the country’s largest commercial property REIT, owning 230 properties comprising 38.3 million square feet of leasable space primarily in Canada’s six largest metropolitan areas. The company has a stable base of recurring rental income from primarily investment-grade creditworthy tenants and is in an advantaged position with a deep development pipeline, much of which is already permitted and zoned for mixed-use residential. The company is methodically executing a portfolio high grading strategy by disposing of non-core assets in secondary and tertiary communities in order to focus on the metro markets where it is increasingly seeing density intensification opportunities to repurpose assets. This slow metamorphosis away from shopping malls and towards residential property over time should allow the units to re-rate towards the 2 to 3 per cent yield that residential REITs trade at versus its current 5.5 per cent yield.

PAST PICKS: SEP. 13, 2018

ALIMENTATION COUCHE-TARD (ATD/B:CT)

• Then: $65.82
• Now: $82.34
• Return: 25%
• Total return: 26%

SCOTIABANK (BNS:CT)

• Then: $75.12
• Now: $71.02
• Return: -5%
• Total return: -1%

FRANCO-NEVADA (FNV:CT)

• Then: $81.37
• Now: $133.54
• Return: 64%
• Total return: 66%

Total return average: 30%

FUND PROFILE

Goodreid North American Balanced Fund

Goodreid’s balanced approach allows investors to participate in the potential growth of equity holdings while mitigating risk through ownership of quality fixed income instruments.

Performance as of: June 28, 2019

• 1 year: 3.0% fund, 3.3% index
• 3 years: 8.7% fund, 5.8% index
• 5 years: 6.3% fund, 4.2% index

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

TOP HOLDINGS

1. U.S. equities: 39%
2. Canadian equities: 32%
3. Canadian fixed income: 18%
4. Cash: 11%

WEBSITE: goodreid.com