Mar 27, 2019

Gavin Graham's Top Picks: March 27, 2019

BNN Bloomberg

Gavin Graham , BNN Bloomberg

Gavin Graham, contributing editor at The Income Investor Newsletter
Focus: North American and global large caps

MARKET OUTLOOK

With the Federal Reserve effectively announcing the end of rising interest rates at last week's meeting and the end of quantitative tightening (QT) this year, investor sentiment has switched from depression to qualified euphoria in the last three months. North American indexes are up between 10 and 16 per cent this year after the worst December since 1931 and valuations are again looking stretched for popular sectors, such as technology.

The inversion of the U.S. yield curve has traditionally been an indicator that recession (or at least a slowdown) is on the way. In the meantime, trade tensions between the U.S. and China are still unresolved, Chinese GDP growth is at its lowest level in 20 years, Italy and Germany are in a recession and a no-deal Brexit remains a possibility. Investors should be taking the opportunity to lock in some profits which the recent rebound has offered them. Looking at a stock, you should be asking yourself the following: If you could have sold this at its current price back in December, would have you done so? If the answer is yes, then remember it's never wrong to take some profits.

Rate-sensitive sectors such as pipelines, utilities, REITs and financials have rebounded and still are reasonably valued and offer a decent yield. Technology, consumer cyclicals and economically-sensitive sectors like autos, chemicals and transports look vulnerable. With central banks ending rate rises, gold looks attractive and the recent mergers in the sector indicate that management thinks so too.

TOP PICKS

CHOICE PROPERTIES REIT (CHP_u.TO)
Bought on September 2018 at $12.39.

Choice Properties owns grocery-anchored retail properties. Following its merger with Canadian REIT in, it’s the largest diversified REIT in Canada: 78 per cent of its portfolio of 757 properties retail (primarily Loblaws supermarkets), 14 per cent is industrial and the remaining 6 per cent is offices.

The management team of Canadian REIT, the oldest publicly-quoted REIT in the country, is now running Choice, which is 65-per-cent owned by Loblaw's parent George Weston. It intends to develop mixed-use intensification for various retail sites in the Greater Toronto Area. In the meantime, funds from operations (FFO, the REIT equivalent of earnings per share) were $603 million for 2018, FFO per unit down slightly from the previous year due to more units in issue. Occupancy was 97.9 per cent and same asset net income was up 1.4 per cent. Choice yields 5.3 per cent.

AGNICO EAGLE (AEM.TO)
Bought on February 2019 at $57.29.

Agnico Eagle is one of the major gold producers, with eight mines in politically stable jurisdictions in Canada, Finland and Mexico. It’s regarded as the best managed among the majors.

Agnico produced 1.63 million ounces of gold in 2018 at an all-in sustaining cost (AISC) of U$877 per ounce. This is the seventh year in a row that gold production and costs have been better than forecast. It has forecast production of 1.75 million ounces for 2019 at an AISC of U$875-925 per ounce due to new mines in Nunavut coming on stream. It yields 1.1 per cent.

SAVARIA (SIS.TO)
Recommended on November 2018 at $17.

Savaria is a small-cap stock that manufactures stair lifts, elevators and converts vehicles for wheelchair use. It has expanded rapidly, buying medical bed company Span America for $110 million and Swiss rival stair lift maker Garaventa for $100 million in 2018.

While 2018 revenues met expectations at $286 million, adjusted earnings before interest, tax, debt, depreciation and amortization (EBITDA) were below forecast at $40 versus $44 million. This was due stiffer competition in Europe. The stock is down 235 over the last year. However, it forecast revenue of $385-400 million in 2019 and adjusted EBITDA of $55-60 million. Savaria sells for a forward price-to-earnings ratio of 18.5 times and yields 3.2 per cent.