Full episode: Market Call for Wednesday, March 13, 2019
Don Lato, president and Padlock Investment Management
Focus: North American equities
After a very difficult fourth quarter, markets have recovered a large part of their losses. The selling crescendo on Christmas Eve, one trading day after my last appearance, may have indeed signaled a bottom for this cycle. A re-test of those lows is obviously still possible but the likelihood passes with each day as the overall economy still remains relatively solid.
The just ending earnings season was largely positive with 69 per cent of S&P 500 companies beating estimates and an overall year-over-year earnings growth rate of 13 per cent. The current multiple of earnings for the S&P is 16.1 times 2019 estimates which is slightly below the five year average multiple of 16.4 times. Overall guidance given for year-over-year earnings growth for the balance may not have been robust, but it can be categorized as cautiously positive among most sectors.
Among those earnings reports were numerous companies that did disappoint and generally and their stocks were pummeled. At the same time a large number of stocks were rewarded with outsized gains following positive earnings releases. With the market valuation rebounding to an average level, stock picking will be the route to doing better than a market that is fairly but no longer undervalued.
YETI HOLDINGS (YETI.N)
Last purchased in February at $23.87.
In 2006, brothers Ryan and Roy Seiders were looking for the perfect cooler to use on their fishing trips so they decided to build their own. This lead to the launch of YETI. Branching out beyond coolers, Yeti now also produces a full line of outdoor drinkware and other outdoor products.
YETI remains a very popular and high-end brand in the geographic markets that it serves, which accounts for the growth story underlying this stock. To date, the company has limited geographic distribution. The vast majority of its retail distributors are located in the southern U.S. where the brand is extremely well recognized and possesses a certain cache. As the company expands geographically and also bolsters is direct to consumer sales through online sales and company owned stores, there should be a very solid runway of revenue and profit growth in the years ahead.
YETI does trade at a premium multiple of 23.5 times this year’s estimates but with its strong brand and 20 per cent plus projected growth, the current price continues to represent good long term value.
CHEMTRADE LOGISTICS INCOME FUND (CHE_u.TO)
Last purchased in February at $9.20.
One of the last remaining income trusts that were issued in the early years of this century, Chemtrade has suffered through a very difficult year which culminated with the release of disappointing earnings last month. The company provides various chemicals to a number of industries and suffered through a period of oversupply with low selling prices.
The outlook for 2019 is for a modest improvement as this extremely well managed company navigates its way through a less than robust environment. Chemtrade has paid an annual distribution of $1.20 per share since 2007 as it has grown through various acquisitions. In spite of its difficulties, Chemtrade continues to generate enough cash flow to more than cover their distribution. Analyst estimates for the 2019 payout ratio range from 62 per cent at BMO to 90 per cent at RBC suggesting adequate coverage of the current 12.7 per cent yield.
WALGREENS BOOTS ALLIANCE (WBA.O)
Last purchased last week at $62.00.
Walgreens has recently been the victim of the double whammy of renewed concerns about Amazon further expanding into the grocery and pharmacy market, as well as the overall weakness in the health care sector as political rhetoric about health care costs from both parties escalates.
The stock has been driven down to 9.5 times this year’s earnings, which is well below its historical average. With the price decline, the yield has risen to 2.9 per cent and given the fact that the company has raised their dividend for 43 consecutive years, another dividend increase at mid-year is highly probable. The company is also returning money to shareholders through a $10 billion buy-back program. Walgreens remains well financed and although earnings growth may be slowing, the current price is an excellent long-term entry point for a company that is currently out of favour but remains a leader in a still essential business.
PAST PICKS: April 20, 2018
HI-CRUSH PARTNERS (HCLP.N)
- Then: $12.10
- Now: $4.25
- Return: -65%
- Total return: -61%
TD BANK (TD.TO)
- Then: $70.19
- Now: $75.31
- Return: 7%
- Total return: 10%
ULTA BEAUTY (ULTA.O)
- Then: $235.05
- Now: $315.03
- Return: 34%
- Total return: 34%
Total return average: -6%
Padlock Growth Composite
Performance as of: Feb. 28, 2019
- 1 month: 2.5% fund, 3.3% index
- 1 year: 2.1% fund, 7.3% index
- 3 years: 10.9% fund, 12.6% index
Index: 50% S&P/TSX, 50% S&P 500 Total Return
Returns are net of fees, distributions and annualized
TOP 5 HOLDINGS AND WEIGHTINGS
- Apple: 9.0%
- Parex Resources: 8.1%
- Alphabet: 7.3%
- Visa: 7.3%
- Tourmaline Oil: 5.1%