David Baskin's Top Picks: March 26, 2019

David Baskin, president of Baskin Wealth Management
Focus: North American large caps

MARKET OUTLOOK

While there are unquestionably signs of weakness in the North American economies, we remain optimistic about stocks. Very high employment is driving retail spending while corporate profits remain at record levels. The recent drop-off in interest rates makes investment in conventional fixed income securities unattractive and certainly makes the yields on traditional safe-haven stocks such as banks, pipelines and utilities look attractive. We don’t expect to see any rate tightening in 2019.  As always, our emphasis remains on high-quality profitable companies operating in sectors that present significant barriers to entry by new competitors.

TOP PICKS

FIRSTSERVICE (FSV.TO)

FirstService has two businesses: Residential and Brands. FirstService Residential is the largest provider of residential property management outsourcing in North America, handling things such as maintenance fee collection, supplier management and financial statements. It can also tack on ancillary services such as pool management or energy conservation. Despite having a 5 per cent market share, FirstService continues to take share through its strong brand name recognition and a continued trend towards outsourcing.

The Brands business is made up of a mix of home improvement brands including Paul Davis, California Closets, Century Fire and CertaPro, with FirstService focused on re-acquiring its franchisees to improve their operations. Paul Davis is also a beneficiary of natural disasters such as wildfires and hurricanes.

MORGUARD (MRC.TO)

Morguard is a non-REIT real estate company. We think its CEO, K. Rai Sahi, is one of the more underrated capital allocators in Canada. Since 2008, Morguard has grown its net asset value (NAV) by over five-fold by retaining most of its cash flow and making smart discounted acquisitions and redevelopments. Despite this, Morguard trades at a heavy discount to REITs at just nine times funds from operations versus valuations in the 20 times range for most REITs. This is in part because of the illiquidity and the low dividend payout. At a 39 per cent discount from NAV, we’re happy to own Morguard as it continues to grow its book value per share.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

Brookfield Asset Management is one of the world’s largest alternative asset managers with around $475 billion in assets under management after the Oaktree deal. The company will be a significant beneficiary of the long-term trends of increased asset allocations by investors to real assets and alternatives (especially given low interest rates) as well as the shift of infrastructure investment from governments to private enterprise given both high levels of government debt and the need for infrastructure.

Brookfield’s global scale allows it to be an operator of choice, being one of the few managers with enough capital to fund massive projects such as the $3.3 billion acquisition for Enercare, and the $15 billion deal for General Growth Properties. Over the next decade, Brookfield’s strong performance will also allow it to realize a significant amount of carried interest. Oaktree’s strong capabilities in distressed credit will also help minimize the cyclicality of the existing Brookfield business. 

PAST PICKS: FEB. 13, 2018

KEYERA PIPELINE (KEY.TO)

• Then: $32.37
• Now: $31.54
• Return: -3%
• Total return: 4%

SCOTIABANK (BNS.TO)

• Then: $76.87
• Now: $70.62
• Return: -8%
• Total return: -4%

CCL INDUSTRIES (CCLb.TO)

• Then: $55.79
• Now: $52.95
• Return: -5%
• Total return: -4%

Total return average: -1%

WEBSITE: baskinwealth.com
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