Apr 25, 2019

Bryden Teich's Top Picks: April 25, 2019

BNN Bloomberg

Bryden Teich , BNN Bloomberg

Bryden Teich, portfolio manager at Avenue Investment Management
Focus: North American equities

MARKET OUTLOOK

Interest rates have moved down significantly so far in 2019. A slower economic growth backdrop has pushed central banks to the sidelines around the world, notably the Fed, ECB and Bank of Canada. This has been a major contributor to the higher stock markets we’ve seen thus far in 2019.

The economic data so far this year has been soft in the U.S. and Canada, but not terrible. Our focus from a macro perspective is on looking out for the duration of this year and trying to determine if the economic backdrop is conducive to decent growth in 2019 and 2020. The jobs market seems to be resilient and the leading economic indicators are also still in positive territory. Key metrics to focus on are consumer and business confidence. Although they’ve recently pulled back from near all-time high levels, they’re still showing positive readings that would be conducive to a moderately expanding economy.

If the economy continues to expand moderately, then I think we’re looking at an environment where the stock market could move higher on late-cycle multiple expansion. This is something that we’re watching for very closely. Positive momentum on US - China trade talks and also Brexit would help market sentiment through the balance of the year.

On the other hand, retail sales have been weak in the U.S. and industrial production has been soft as well. The jobs data each month becomes more and more important as an indicator to see if the economy is still expanding.

The biggest red flag is that the U.S. is also increasing their national debt at close to 7 per cent of GDP this year (which is absolutely crazy) and running an official deficit of somewhere between 4 and 5 per cent of GDP, an unprecedented level given we’re so late in the economic cycle. This isn’t sustainable over the longer term. In the next Fed cutting cycle there’s a strong chance we see a much weaker U.S. dollar because the central bank will have to embark on a large-scale quantitative easing program that includes outright debt monetization. Although the U.S. dollar remains strong, the current situation makes us more cautious on the outlook over the next few years.

The yield curve is also beginning to flash a yellow sign which doesn’t bode well for the medium-term economic growth outlook. Investors should be watching closely the spread between overnight interest rates and the five- and 10-year rates. The interest rates market is pricing in the next move in rates as a cut by the BoC and the Fed. This is something to watch for.

TOP PICKS

SUPERIOR PLUS (SPB.TO)

Superior is an energy and chemicals distributor. A core part of their business is propane distribution throughout the U.S. northeast. They’ve executed on a number of acquisitions over the last few years, which has helped the company expand their geographical footprint and also continue to add more retail customers. Because of the colder winter in the northeast, they’ve maintained company guidance at the high end of their expectations for 2019. The shares currently yield over 6 per cent and have a payout ratio of less than 50 per cent. We think the shares are trading at an attractive multiple and there’s ample room for the company to continue to add tuck-in acquisitions throughout the year.

VERMILION ENERGY (VET.TO)

Vermilion is a diversified energy producer that has assets in Saskatchewan, Europe, and parts of the U.S. They’re one of the few Canadian producers who have exposure to Brent and European natural gas pricing, which has been a key stabilizer for the business relative to the volatile oil price environment in North America. The shares are yielding over 8 per cent and give investors a stable way to gain exposure to a recovery in the sentiment of the energy sector. Vermillion also has a very strong management team that has consistently shown a disciplined approach to balancing growth capital spending, sustainable dividends and strategic acquisitions.

PRAIRIESKY (PSK.TO)

The company owns the largest acreage of royalty lands in Western Canada at almost 16 million acres. It receives a perpetual royalty stream off oil and gas production on its land base and offers investors an opportunity to own a perpetual resource exposure with a pristine balance sheet and cost-free commodity exposure. The shares are trading at an attractive level and are near the low end of their historical valuation. It’s currently yielding just under 4 per cent.