Lyle Stein, senior portfolio manager and managing director at Vestcap Investment Management
Focus: Canadian equities

MARKET OUTLOOK

At Vestcap, we’re going into 2019 with very high cash levels (20 to 30 per cent). While the market has put in a nice move over the past two weeks, the question going into the new year is whether we have finished the Q4 correction or whether what we experienced since the beginning of October is something more ominous. The trend of lower lows and lower highs needs to be broken.

Our tea leaves aren’t well-aligned at this point. Earnings growth is rapidly slowing (20 per cent for 2018 looks like 8 per cent for 2019) and economic activity seems to be pausing, with global growth ratcheting down daily. Commodity prices remain depressed and the U.S. dollar remains the go-to currency. Closer to home, the outlook for Canada isn’t promising, with slowdown concerns from energy, housing and exports all providing a drag.

All the big-picture issues aside, the good news is that many individual stocks are very cheap. The 20 per cent market decline in Q4 masks the fact that many names are down even more – having disappointed early in 2018, they became secondary casualties as index selling took all stocks down over the past few months, beating down the already broken.

In Canada, the beaten-broken names are concentrated in the resource and mid-cap names. The lack of buying interest coupled with an extreme bout of tax-loss selling is providing a wonderful opportunity for us to put cash to work, particularly in names with above-average dividend yields. 6 per cent dividend yields for quality companies are much easier to find than at any time over the past three years.

TOP PICKS

SUNCOR ENERGY (SU.TO)

Suncor is the oil name we own, bought in the low $40s. This company is a cash flow machine that’s reasonably protected from the Alberta oil price due to it downstream refining. At roughly 800,000 barrels per day, it generates between $9 and $10 billion of cash flow (strip prices), requiring $5 to $6 billion of capital expenditure. The remainder goes to dividends, buybacks and debt repayment. The 3.7 per cent yield is safe. Lots of market torque in the name: the commodity, Canada and size.

FEDEX (FDX.N)

We own it and are looking to add at these levels. FedEx’s stock has been pounded after a Q1 earnings release where the company voiced some concerns about a global slowdown. There was a huge price-to-earnings adjustment as consensus estimates were cut from a $17- to a $15-range. The company typically trades at a mid-teens multiple, currently at 11 times. FedEx is a free cash flow generator with a low payout ratio and a leading market position. It has a 2 per cent yield.

FIERA CAPITAL (FSZ.TO)

We own this company in high-income oriented accounts and it was recently purchased in the $10-range. Fiera is a Canadian asset manager with a growing global footprint. The investment thesis is simple: grow assets to $250 billion by 2022 ($140 billion today) and increase its EBITDA (earnings before interest, tax, depreciation and amortization) margin to 30 per cent (27 per cent today). Grow assets by acquisition and increase the fee mix with a focus on U.S. and the world. Fiera is a historical dividend grower. Its current yield is 7 per cent.

PAST PICKS: DEC. 1, 2017

ENBRIDGE (ENB.TO)

• Then: $48.63
• Now: $42.53
• Return: -13%
• Total return: -7%

ELECTRONIC ARTS (EA.O)

• Then: $106.02
• Now: $77.93
• Return: -26%
• Total return: -26%

WHIRLPOOL (WHR.N)

• Then: $167.46
• Now: $106.16
• Return: -37%
• Total return: -34%

Total return average: -22%

WEBSITE: vestcap.com