Full episode: Market Call for Friday, January 8, 2021
Chris Blumas, vice-president and portfolio manager at GlobeInvest Capital Management
Focus: North American large caps
2020 was a volatile year for investors. While calendar year returns were solid around the world, investors were taken on a roller coaster ride that they are unlikely to forget. During 2020, the major global equity market indexes performed in dramatically different fashion. Leading the way was the NASDAQ, which posted a total return of almost 44 per cent. In comparison, the S&P/TSX Composite and S&P 500 posted a total return of 5.6 and 18.4 per cent respectively. The dominant style in 2020 was growth, as investors aggressively bid up the share prices of companies with above-average organic growth profiles. This aggressive pricing quickly extended to IPOs and SPAC issues as the promise of future growth was enough to send share prices soaring.
With 2021 just getting underway, there are a few uncertainties that continue to overhang the equity markets. First and foremost is the containment of COVID-19 and its long-term impact on the global economy. On the positive side, vaccination programs have started to roll out around the world and could lead to the resumption of more normal daily activities and spending patterns within the next few years. Other areas of concern include President-elect Joe Biden's economic policy platform, the growing influence of large technology companies and current equity market valuations.
These ultra-low rates and a wave of liquidity have supported equity markets and lead to the divergent performance of the economy and the stock market. While the shape and the duration of the current recession remain unclear, there are pockets of value in today’s equity markets and I think that investors should remain defensive and avoid the temptation to speculate and chase returns. Sectors that look to offer attractive value in today’s market include energy infrastructure, financials, and REITs.
DOLLAR TREE (DLTR NASD)
Most recent purchase $114 on Jan. 7.
Dollar Tree is a North American-focused dollar store operator that operates 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 pandemic, the company was dealing with a few short-term (shrink, freight, DC costs) and medium-term (import tariffs, banner integration) issues that impacted 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 18.4 times forward earnings and have a trailing free cash flow yield of 5.1 per cent.
ENBRIDGE (ENB TSX)
Most recent purchase $43 on Jan. 7.
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 8.8 times forward cash flow and have a dividend yield of 7.9 per cent with a cash flow payout ratio of 69 per cent.
BROOKFIELD ASSET MANAGEMENT (BAM/A TSX)
Most recent purchase $49 on Jan. 7.
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 13.5 times adjusted funds from operations and have a free cash flow yield of 4.6 per cent.
Past Picks: December 16, 2019
Chartwell Retirement Residences (CSH-U TSX)
- Then: $14.09
- Now: $10.68
- Return: -24%
- Total Return: -20%
Pembina Pipeline (PPL TSX)
- Then: $47.65
- Now: $33.97
- Return: -29%
- Total Return: -23%
Johnson & Johnson (JNJ NYSE)
- Then: $141.79
- Now: $160.31
- Return: +13%
- Total Return: +16%
Total Return Average: -9%