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

MARKET OUTLOOK

The market sell-off over the past week has been a long time coming. Valuations in the broader indexes had reached extreme levels and market technicals were in significantly overbought conditions. The news item that contributed to this sell-off was the spread of the coronavirus to other countries around the world. The risk the virus will continue to spread is certainly something that market participants should be focused on, as it will have significant ramifications for different sectors in the economy.

The other item that contributed significantly to this sell-off was the surge of Bernie Sanders in the Nevada and South Carolina primaries. The betting market now has Sanders winning the nomination at greater than 50 per cent odds. Based on his early success, the market will need to start taking him more seriously, especially with Super Tuesday approaching on March 3.

Finally, the last significant development over the past two weeks was the significant drop in long-term interest rates to historical low levels. The bond market is now starting to price in multiple interest rate cuts from the Federal Reserve over the coming months, as the fear around global growth gets stronger. Although the growth outlook is weak, we believe central banks will continue to provide liquidity to the markets through lower rates and further easing. Although we don’t believe much of this liquidity and easing will make its way into the “real” economy, we expect that they will make their way into financial assets once the current volatility subsides.

We’re at a very crucial time in the market juncture and investors should be prepared accordingly. We currently like gold and silver, REITs, infrastructure and industrials based on the current market environment. We also believe it is crucial investors remain very focused on risk management and take profits on some of their larger gains so they have cash if the markets end up moving lower.

TOP PICKS

EVERCORE (EVR NYSE)

Evercore is the largest independent (non-bank) investment banking advisory firm globally, based on its market share. It is also the top-ranked independent research firm in the U.S. for a number of years running. Evercore has benefited from being a very attractive place to work, luring top investment banking talent who no longer want to work for the big banks. It generates over 30 per cent return on invested capital and currently has close to an 18 per cent free cash flow yield. The market cap of the company is $3.3 billion, but it has $1.2 billion on the balance sheet in cash and short-term investments. This is a phenomenal business to be buying at 9 times earnings.

BERKSHIRE HATHAWAY (BRK/B NYSE)

Berkshire is Warren Buffett’s investment holding company. Shares are trading at a great level for long-term investors to start building a position. It’s lagged the broader U.S. market over the past few years as investors grew impatient with the large pile of cash Berkshire is sitting on, currently at around $130 billion. This dry powder will position Berkshire very well to take advantage of any market dislocations over the coming years. At the same time, Berkshire also owns shares in a number of high-quality American businesses, including 10 per cent of many of the major banks and airlines in addition to Apple and Burlington Northern Santa Fe Railroad. Berkshire also has one of the best-run insurance companies in the world in GEICO.

BOARDWALK REIT (BEI-U TSX)

Boardwalk is a residential real estate company based largely in Western Canada. After several years of weakness, our view is that Boardwalk is trading at an attractive level and at a significant discount to its apartment peers throughout Canada. Apartment rentals will remain a very attractive asset class over the next decade.

PAST PICKS: APRIL 11, 2019

SUPERIOR PLUS (SPB TSX)

• Then: $11.68
• Now: $9.83
• Return: -16%
• Total return: -11%

VERMILION ENERGY (VET TSX)

• Then: $34.02
• Now: $12.94
• Return: -62%
• Total return: -57%

ONEX (ONEX TSX)

• Then: $77.14
• Now: $74.45
• Return: -3%
• Total return: -3%

Total return average: -24%

WEBSITE: avenueinvestment.com/