Bruce Campbell, president and portfolio manager at Campbell, Lee & Ross

Focus: Canadian large caps
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MARKET OUTLOOK
The Canadian equity market is a different animal than the one our American friends have to deal with. Energy and financials dominate the TSX by weight, comprising over half of the index. So, going to the U.S. and Europe for diversification does make sense. In the first part of the year, the unexpected strength in the loonie had wiped away the returns from those markets and so overall, Canadian dollar returns were fairly flat. We believe the Canadian dollar is overvalued and will give back a decent chunk of its rise, and so we stay well-invested outside of Canada. In our domestic market, Canadian banks have underperformed, and we think that will reverse in the second half. Also, energy appears to be at least stabilizing and the area is oversold, so there may be some bounce back. If that happens, the TSX will outperform the S&P, at least in Canadian dollars.

Having said that, U.S. valuations are quite high, so having a bit of cash on the sidelines and being somewhat defensive over the next couple of months makes sense. Interest rates will rise in both countries likely one more time this year, which makes the fixed-income outlook unattractive and will help money flow into equities.

TOP PICKS

ENBRIDGE (ENB.TO)
Enbridge is one of the largest pipeline companies in North America. It currently yields almost five per cent today, the highest yield since 2001 and the highest relative yield against bonds that we can find. With a management-disclosed plan of 10 to 12 per cent dividend growth through 2024, we find the entry point to be excellent. There are timing risks beyond 2020, but we think this is more than currently discounted in the current price. Recent purchases at $49.50.

CARDINAL ENERGY (CJ.TO)
Cardinal is a smaller, Alberta-based oil producer that has been hit like every other stock in the group. A recent acquisition, which was done in part with stock, was not well-received in the negative oil environment, and the stock is now grossly oversold. They have trimmed spending to keep their balance sheet in good shape and are also doing some small asset sales. At current levels, you get a very low decline rate, a 10 per cent dividend yield (which is sustainable down to below $40 WTI), and a 4x cash flow multiple so you get paid to wait while the sentiment improves. Recent purchases were at $3.86.

TD BANK (TD.TO)
The Canadian banks have declined year-to-date due to the Home Capital saga and the worry of a housing bubble generally. TD is now more than 50 per cent U.S by revenue and has improving profitability there. It has retreated to an average multiple in the group. We therefore believe that with the three per cent+ yield, a dividend increase later in the year is likely and positive, albeit with mild earnings growth going forward, which will provide an attractive and safe return. Recent purchases are at $63.50.
 

PAST PICKS: JULY 12, 2016

TOREX GOLD (TXG.TO)
Still own; having some gold weighting in uncertain times makes sense

• Then: $24.62
• Now: $19.10
• Return: -22.42%
• Total Return: -22.42%

ALIMENTATION COUCHE-TARD (ATDb.TO)
Still own; growth by acquisition in the U.S. should continue

• Then: $57.84
• Now: $61.15
• Return: 5.72%
• Total Return: 6.45%

H&R REIT (HR_u.TO)
Still own; cheapest senior REIT, six per cent yield and trading 15 per cent below its NAV

• Then: $23.60
• Now: $21.42
• Return: -9.21%
• Total Return: -2.51%

TOTAL RETURN AVERAGE: -6.16%