Jason Mann, chief investment officer at EHP Funds
FOCUS: North American equities

MARKET OUTLOOK

Markets have rebounded post-election and are again at all-time highs in the U.S.  Surprising as it is, it would be hard to argue against this being a new “bull” market.

Markets have been buoyed so far by stimulus from central banks and governments, but now they are starting to look through to the end of the pandemic whether that comes from vaccines or from a natural waning of the virus.

For the first time in a while, investors are talking about the risk of inflation as a result of the money supply increase. The inflationary outlook may be partially responsible for the rally in gold, along with the falling U.S. dollar.

For those who feel like they’ve missed the rally, there are still opportunities in the “have nots” of smaller, more cyclically-oriented stocks.  These “return-to-work” stocks in industrial, consumer discretionary and financial sectors have plenty of catching up to do.

This week saw the largest single shift in “momentum” ever, where stocks that had been trending up suddenly sold off (mostly growth stocks), and stocks that had been in a downtrend suddenly rallied (mostly junky energy and financials).

This divergence was driven by hedge funds covering shorts on beaten up “junk” stocks, but is yet another sign that the market is trying to look forward through to a vaccine and an end to the pandemic and is re-positioning for that.

We’re rotating from more defensive/growth stocks to cyclical ones as we get further evidence that the value rally can take hold.

We see value in industrials, consumer discretionary, and financials. We’re avoiding the most expensive technology stocks. For the first time in a while, we are buyers of select energy and materials stocks, which represent some of the “deepest” value in the market today.

TOP PICKS

Celestica (CLS TSX)

Celestica is a contract manufacturer in electronics, communications, storage, etc.  They provide design and development, supply chain management and electronics manufacturing. We like it primarily from a value perspective.  We had actually been short the stock a few years ago, and made money with that position, but it has become cheap enough that it warrants being on the long side now.

iA Financial (IAG TSX)

iA is a Quebec-based financial services firms offering insurance and financial advice, brokerage and other services. Financials overall have been in the “value” bucket and the sector has been hard-hit in terms of share prices.  They’ve been in the “have not” category as interest rates plunged.  But, we think financials should outperform on the other side of the pandemic and as yield curves turn higher as they’ve done recently. 

Tourmaline Oil (TOU TSX)

Tourmaline is an oil and natural gas exploration and production company, with an extensive inventory of development projects. It’s now the largest natural gas producer in Canada, widely viewed as having one of the best management teams in the business.

One of the challenges for the traditional energy sector has been the ESG movement, which has starved the sector of capital.  Natural gas however is viewed more favourably as a bridge solution to clean energy.

They are also one of the “survivors” and have used their strong balance sheet to pursue M&A, buying in projects that are accretive and well priced.

PAST PICKS: NOVEMBER 1, 2019

Granite REIT (GRT-U TSX)

• Then: $65.66
• Now: $77.38
• Return: +18%
• Total Return: +22%

Toromont Industries (TIH TSX)

• Then: $68.34
• Now: $86.63
• Return: +27%
• Total Return: +29%

BRP Inc. (DOO TSX)

• Then: $59.42
• Now: $65.08
• Return: +10%
• Total Return: +10%

Total Return Average: +20%