Lyle Stein, senior portfolio manager and managing director at Vestcap Investment Management

Focus: Canadian equities
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MARKET OUTLOOK
2016 was a wonderful year for Canadian investors. In 2017, our primary objective at Vestcap is to preserve the gains made over the past 12 months. The Trump rally is looking like a classic "buy on rumour, sell on news" event. While the policies espoused by the new administration are unquestionably positive for equities, the realities of implementation are looking increasingly difficult, with disappointment potential very high.

Liquidity rallies such as the one seen since November 8 are always difficult to catch, and this was no different. Between short covering, asset class reallocation from bonds to stocks, and a sector rotation from defence to more economically-sensitive areas, the two-month rally in equities was a nice way to end a good year. Looking ahead, however, we take a cautious approach with client portfolios, thinking more about avoiding risk than once again capturing double-digit gains. The one-way trade of the last three decades — own bonds — is over, in our view. The increasing degree of market correlation is another risk we are watching. 

In this environment, we are holding above-average cash (10 per cent or so), preferred shares for income and relative stability, and lower-than-market P/E stocks for stable upside. We are concerned that Canada could be a loser in a trade war with the U.S., and are increasing exposure to names with non-Canadian sourced revenues. Our focus is on dividend payers, looking to be "paid while we wait."

TOP PICKS

TRANSCANADA PREFERRED SHARES SERIES 15 (TRP_pk.TO) – Recently added at $25.50
"Paid while we wait." We bought the issue and have added ever since. The 4.9-per-cent dividend yield is over 6.3 per cent on an interest-equivalent basis. Its "floor" reset provision protects the owner from the reset experience which plagued reset issues over the past three years. Wonderful alternative to corporate bonds or cash.

MANULIFE FINANCIAL (MFC.TO) – Recently added at $20
"Decades of ever-lower rates is over." Preferred insurance play because of non-Canadian exposure. One-third U.S., one-third Asia, and one-third Canada a bit of a tail wind in a lower-Canadian-dollar environment. Dividend payout can be increased, providing enhance dividend growth opportunities. First name added when increasing Canadian domestic financial exposure. We originally added the position in October around $19.50 because it traded below book value and offered a reasonable four per cent dividend yield. Today, we continue to like the company because of the steeper yield curve and prospect for additional rate hikes.

ZIMMER BIOMET HOLDINGS (ZBH.N) – Recently added at $103
"Aging play via orthopaedic appliances."  Health-care investment with no Canadian equivalent. Low multiple (14x) relative to its peers, good earnings growth visibility, and a free cash generator, ZBH was hit last quarter with a supply chain disruption, which created buying opportunity. Q4 results were a positive surprise.
 

PAST PICKS: MARCH 31, 2016

AGNICO EAGLE MINES (AEM.TO)

• Then: $46.99
• Now: $63.23
• Return: +34.56%
• TR: +35.38%

NORTHLAND POWER (NPI.TO)

• Then: $21.42
• Now: $24.23
• Return: +13.11%
• TR: +17.63%

HIGH LINER FOODS (HLF.TO)

• Then: $15.00
• Now: $19.25
• Return: +28.33%
• TR: +30.78%

TOTAL RETURN AVERAGE: +27.93%