MARKET OUTLOOK:

While mariners and Canadian folk music aficionados know that the “gales of November (are) remembered,” investors know that the gales of September can make for tumultuous times as well, with September the seasonally weakest month of the year for the S&P/TSX Composite, with an average return of -0.9 per cent over the last 25 years.

Month to date, Canadian stocks have eked out a gain of 0.7 per cent, but with political risk on the calendar in the face of the upcoming election and with back to school season underway and the Delta variant of the coronavirus circulating more widely, market sentiment has turned more cautious and tentative of late.

In our view, any pullback in share prices that might arise is not to be feared, but rather to be bought. The economic cycle remains only in its middle stages, and with 77 per cent of the eligible Canadian population fully vaccinated, even if the spread of the COVID-19 virus were to become more problematic, unlike in earlier waves of the pandemic, we don’t expect growth-stifling draconian lockdowns to occur.

Accordingly, we expect continued robust earnings growth through the remainder of the year and into next year and note that the S&P/TSX Composite trades at an undemanding 16x expected earnings, roughly in line with its ten-year average of 15.6x earnings.
 

TOP PICKS:

Curaleaf Holdings (CURA CSE) 
Latest purchase Sept, 2021 @ $15.06
Curaleaf Holdings is the world’s largest producer of marijuana, as measured by sales. Operating entirely in the United States and in Europe but listed in Canada, Curaleaf is vertically integrated with a presence in 23 states and five western European countries, including 23 cultivation sites, 30 processing facilities and 109 dispensaries.

The company is growing rapidly, both organically with many new dispensaries opened in recent quarters and with licenses to open a further 16 stores, as well as via acquisitions. The company is leveraging its roots in medicinal marijuana and moving into recreational marijuana as more and more states legalize it.

Unlike the Canadian market, which is oversupplied and where the regulated market is struggling to compete with the black market, the United States market is undersupplied. And 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.

SNC-Lavalin (SNC TSX) 
Latest purchase Sept, 2021 @ $36.17
SNC-Lavalin provides engineering, design, procurement and project management services, serving clients in the nuclear energy, natural resource and infrastructure sectors, among others. A unique differentiator for SNC relative to its rivals is its principal investments portfolio, which allows it to co-invest in infrastructure projects alongside its clients, with the largest and most notable example being the 407 toll road north of Toronto.

Under entirely new leadership the last few years, the company has moved to de-risk its business model, is running off troublesome fixed price contracts quickly and divesting its oil and gas business. With a $13B project backlog and with governments increasingly earmarking funds for civic infrastructure renewal, we foresee strong earnings growth ahead and view the shares as reasonably priced, trading at 17x 2022 expected earnings.

Alimentation Couche-Tard (ATD/B TSX) 
Latest purchase Sept, 2021 @ $50.69
Alimentation Couche-Tarde is North America’s 2nd largest independent convenience store operator with nearly 10,000 stores and a further 2,700 locations in Europe and 400 in Hong Kong & Macau.

The company earns returns on equity of 22 per cent and has grown earnings per share at a 25 per cent compound rate over the last decade. The company uses procurement scale to price sharply on fuel, drawing traffic to their sites and then luring shoppers into attractive, modern, well-merchandised stores where merchandise gross margins are 3-5x higher than their profit margin on gasoline.

The company is a very capable acquirer with a demonstrated pattern of realizing significant synergies from acquired businesses, in this still highly fragmented industry. The growth algorithm is shifting towards more organic growth, with merchandising sophistication increasing and digital marketing and loyalty programs gaining traction. This acceleration of organic growth should over time earn a higher valuation.
 

PAST PICKS: September 10, 2020

Franco Nevada (FNV TSX)

• Then: $193.23
• Now: $179.18
• Return: -7%
• Total Return: -7%

CGI Inc. (GIB/A TSX)

• Then: $90.58
• Now: $114.91
• Return: 27%
• Total Return: 27%

Methanex (MX TSX)

• Then: $30.07
• Now: $50.20
• Return: 67%
• Total Return: 68%

Total Return Average: 29%