Chris Blumas, vice-president and portfolio manager at GlobeInvest Capital Management
Focus: North American large caps

MARKET OUTLOOK

The coronavirus has caused unprecedented economic turmoil around the world. Year-to-date, North American equity markets are down around 15 per cent and have rebounded off the mid-March lows as governments around the world have stepped in to support their economies as this health crisis unfolds. We may still be in the early innings, as there is a tremendous amount of uncertainty surrounding the transmissibility and containment of this disease and its long-term impact on the global economy. On the positive side, collaboration among companies playing a role in vaccine development has been tremendous and could lead to an effective vaccine within the next 12 to 24 months and allow for the resumption of more normal daily activities and spending patterns.

Given this uncertain economic backdrop, what should investors do? Overall, I think that investors should remain disciplined and avoid the temptation to exit the equity markets and wait on the sidelines. While the shape and the duration of the current recession are unclear, there are lots of pockets of value in today’s market and over the long-term I think that investors will be rewarded for their discipline. Looking forward, I think that investors should remain defensive and avoid deeply cyclical companies and instead focus their attention on financially strong companies with the ability to generate solid free cash flows and access capital markets on reasonable terms.

TOP PICKS

ENBRIDGE INC (ENB TSX)
Most recent purchase at $41.01 on April 27.

Enbridge is a North American-focused energy infrastructure company with a lower-risk business model. The company has low commodity price exposure, strong contracts, good asset diversification and low counterparty risk. During prior market cycles in 2018-19 and 2015-16, Enbridge produced strong operating performance and continued to grow its cash flows. Additionally, the company has an attractive near-term capital program and the financial flexibility required to pursue a self-funding strategy. The shares currently trade at nine times’ forward cash flow and have a dividend yield of around 8 per cent with a payout ratio of around 70 per cent.

BROOKFIELD ASSET MANAGEMENT (BAM/A TSX)
Most recent purchase at $45.76 on April 27.

Brookfield is a direct investor and third-party asset management firm with a unique focus on real assets and private equity. The company is one of a handful of global private equity players that are uniquely positioned to raise large amounts of capital from institutional clients as they shift their portfolios towards higher-yielding asset classes. While the company has four publicly listed operating subsidiaries, most of these companies have more of a yield focus and do not provide investors with exposure to the rapidly growing asset management business. The shares currently trade at less than 12 times trailing cash flow and have a free cash flow yield of more than 5 per cent.

DOLLAR TREE (DLTR NASD)
Most recent purchase at $80.75 on April 27.

Dollar Tree is a North American=focused dollar store operator operating under the Dollar Tree and Family Dollar banners. The company provides tremendous value and convenience to its customers and has good insulation from online competition. Before the coronavirus, the company was dealing with a few short-term (shrink, freight, DC costs) and medium-term (import tariffs, banner integration) issues that were impacting profitability. Going forward, management has taken steps to address these issues and over the long-term the company has good defensive properties and the ability to grow earnings in a variety of economic climates. The shares currently trade at around 16 times normal earnings.

PAST PICKS: JULY 25, 2019

ENBRIDGE (ENB TSX)

• Then: $44.17
• Now: $43.83
• Return: -1%
• Total return: %4

SCOTIABANK (BNS TSX)

• Then: $70.73
• Now: $56.81
• Return: -20%
• Total return: -16%

RAYTHEON (RTN NYSE)
Purchased as UNITED TECHNOLOGIES (UTX NYSE). Merger on April 3, 2020.

• Then: $136.36
• Now: $66.30
• Return: -18%
• Total return: -16%

Total return average: -9%

WEBSITE: www.globe-invest.com/